<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 0-10605
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ODETICS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2588496
- --------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
or organization)
1515 SOUTH MANCHESTER AVE., ANAHEIM, CA 92802
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714) 774-5000
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(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former addressed and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date
Number of shares of Common Stock outstanding as of August 12, 1997
Class A Common Stock - 5,335,223 shares.
Class B Common Stock - 1,064,241 shares.
1
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INDEX
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PART I FINANCIAL INFORMATION Page
- -------------------------------- ----
<TABLE>
<CAPTION>
<S> <C>
ITEM 1. CONSOLIDATED STATEMENTS OF INCOME FOR 3
THE THREE MONTH ENDED JUNE 30, 1996
AND 1997 (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1997 4
AND JUNE 30, 1997 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6
THE THREE MONTHS ENDED JUNE 30, 1996 AND
1997 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 9
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Part II OTHER INFORMATION
- -------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
ITEM 1 FINANCIAL INFORMATION
ODETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
1996 1997
-------- ---------
<S> <C> <C>
Net sales and contract revenues:
Net sales $28,304 $38,507
Contract revenues 2,499 1,532
------- -------
30,803 40,039
Costs and expenses:
Cost of sales 18,206 24,401
Cost of contract revenues 1,272 897
Selling, general and administrative expenses 6,893 9,310
Research and development expenses 2,288 3,785
Interest expense 493 280
Minority interest in earnings of subsidiary 0 203
------- -------
29,152 38,876
------- -------
Income before income taxes 1,651 1,163
Income taxes 644 546
------- -------
Net Income $ 1,007 $ 617
======= =======
Weighted average number of shares outstanding 6,477 6,686
======= =======
Net income per share of common stock $ 0.16 $ 0.09
======= =======
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1997
ASSETS (unaudited)
--------- -----------
<S> <C> <C>
Current Assets
Cash $ 11,359 $ 2,986
Trade accounts receivable, net 29,424 28,529
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,922 1,770
Inventories:
Finished goods 3,435 3,601
Work in process 3,987 3,520
Materials and supplies 20,855 20,467
-------- --------
Total inventories 28,277 27,588
Prepaid expenses 1,333 3,372
Deferred income taxes 2,056 2,057
-------- --------
Total Current Assets 74,371 66,302
Property, plant and equipment
Land 2,090 2,090
Buildings and improvements 18,238 17,798
Equipment, furniture and fixtures 29,169 31,012
-------- --------
49,497 50,900
Less accumulated depreciation (25,668) (26,391)
-------- --------
Net property, plant and equipment 23,829 24,509
Other Assets 2,738 2,998
-------- --------
Total Assets $100,938 $ 93,809
======== ========
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE>
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS (cont'd)
(in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
--------- -----------
<S> <C> <C>
Current Liabilities
Trade accounts payable $ 18,478 $ 11,985
Accrued expenses 4,179 4,708
Accrued payroll and related 6,851 5,079
Income taxes payable 1,276 554
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,690 2,132
Current portion of long-term debt 1,721 1,593
--------- -----------
Total current liabilities 35,195 26,051
Long-term debt - Less current portion 11,860 13,047
Deferred income taxes 540 513
Minority interest 1,515 1,718
Stockholders' equity
Preferred stock, authorized 2,000,000 shares;
none issued - -
Common stock, authorized 10,000,000
shares of class A and 2,600,000 shares
of class B; 5,319,173 shares of
class A and 1,064,241 shares of
class B issued and outstanding at
June 30, 1997 - $.10 par value 638 638
Paid-in capital 38,927 38,937
Foreign currency translation 52 77
Retained earnings 12,211 12,828
--------- -----------
Total stockholders' equity 51,828 52,480
--------- -----------
Total liabilities and stockholders' equity $ 100,938 $ 93,809
========= ===========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
1996 1997
-------- --------
<S> <C> <C>
Operating activities
Net income $ 1,007 $ 617
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 853 883
Minority interest in earnings of subsidiary 0 203
Provision for losses on accounts receivable 41 193
Provision (Benefit) for deferred income taxes (238) (749)
Net proceeds from settlement of litigation 5,860 0
Gain on sale of assets (200) 0
Changes in operating assets and liabilities;
(Increase) Decrease in accounts receivable 752 702
(Increase) Decrease in net costs and estimated
earnings in excess of billings (898) (406)
(Increase) Decrease in inventories (2,563) 689
(Increase) Decrease in prepaids and other assets (635) (2,461)
Increase (Decrease) in accounts payable and
accrued expenses (242) (7,711)
-------- --------
Net cash provided by (used in) operating activities 3,737 (8,040)
Investing activities
Purchases of property, plant, and equipment (884) (1,403)
Proceeds from sale of equipment 0 0
-------- --------
Net cash used in investing activities (884) (1,403)
Financing activities
Proceeds from revolving line of credit and
long-term borrowings 12,100 11,600
Principal payments on line of credit, long-term
debt and capital lease obligations (16,691) (10,541)
Net proceeds from issuance of ATL Products,
Inc. common stock 0 0
Proceeds from issuance of common stock 1,108 11
-------- --------
Net cash provided by (used in) financing activities (3,483) 1,070
-------- --------
Increase (decrease) in cash (630) (8,373)
Cash at beginning of year 1,142 11,359
-------- --------
Cash at June 30 $ 512 $ 2,986
======== ========
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - In the opinion of management, the accompanying unaudited consolidated
------
financial statements contain all adjustments, consisting of normal
recurring accruals necessary to present fairly the Company's
consolidated financial position as of June 30, 1997 and the
consolidated results of operations and cash flows for the three-month
periods ended June 30, 1996 and 1997. Certain information and
footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The results of operations
for the three-month period ended June 30, 1997 are not necessarily
indicative of those to be expected for the entire year.
Note 2 - Income tax expense for the three-month periods ended June 30, 1996
------
and 1997 has been provided at the estimated annualized effective tax
rates based on the estimated income tax liability or asset and change
in deferred taxes for their respective fiscal years. Deferred taxes
result primarily from temporary differences in the reporting of
income for financial statement and income tax purposes. These
differences relate principally to the use of accelerated cost
recovery depreciation methods for tax purposes, capitalization of
interest and taxes for tax purposes, capitalization of computer
software costs for financial statement purposes, deferred
compensation, other payroll accruals, and reserves for inventory and
accounts receivable for financial statement purposes and general
business tax credit and alternative minimum tax credit carryforwards
for tax purposes.
Note 3 - Long-term Debt
<TABLE>
<CAPTION>
(in thousands)
March 31, June 30,
1997 1997
--------- ---------
<S> <C> <C>
Line of credit $ 2,100 $ 3,700
Mortgage note 10,171 9,940
Contracts payable 1,310 1,000
------- -------
13,581 14,640
Less current portion 1,721 1,593
------- -------
$11,860 $13,047
======= =======
</TABLE>
7
<PAGE>
Note 4 - On March 13, 1997, ATL Products, Inc. ("ATL"), a subsidiary of the
------
Company, completed an initial public offering of 1,650,000 shares of
its common stock, at an offering price of $11 per share (the
"Offering"). Following the Offering , the Company's beneficial
ownership interest in ATL totals was reduced to 82.9%. The Company
has announced its intention to pursue a tax-free spinoff of its
remaining interest in ATL to the Company's stockholders by December
31, 1997, subject to certain conditions including the approval by the
Company's Board of Directors and receipt of a letter ruling from the
Internal Revenue Service concerning the tax-free nature of the
spinoff.
8
<PAGE>
ODETICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In conjunction with the Consolidated Financial Statements and Notes thereto
contained in this Report and in the Annual Report on Form 10-K of Odetics, Inc.
(the "Company"). When used in this Report, the words "expect(s)," "feel(s),"
"believe(s)," "will," "may," "anticipate(s)," and similar expressions are
intended to identify forward-looking statements. 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 or unanticipated events.
Results of Operations
Net sales and contract revenues consist of sales of products and services to
commercial customers ("net sales") and revenues derived from contracts with the
agencies of the United States Government or its prime contractors and long-term
contracts with foreign entities related to space recorders for geographical
information systems ("contract revenues"). Net sales and contract revenues for
the Company in the first quarter of fiscal year 1998 increased approximately
$9.2 million to $40.0 million or 30.0% compared to the first quarter of the
prior fiscal year. The components of this overall increase consisted of an
increase in net sales of approximately $10.2 million, or 36.0%, which was
partially offset by a decrease in contract revenues of approximately $1.0
million, or 38.7%. The Company's net sales and contract revenues of $40.0
million for the first quarter of 1998 included $18.6 million from ATL as
compared to the comparable period in the prior fiscal year of $30.8 million
which included $12.8 million from ATL.
The 36.0% growth in commercial net sales was due to sales growth in all
divisions involved in commercial product sales. This increase was primarily
due to an increase in ATL's net sales which reflected continued growth in its
DLT based products including its new 7100 Series tape libraries that began
shipping in the prior fiscal quarter. The Company also experienced growth in
sales of its telecommunications products in the first quarter of fiscal 1998
compared to the first quarter of the prior year, largely due to increased unit
sales of its synchronization products for cellular telephone systems and sales
of its LIMO family of products for telecommunication interfaces. The Company's
wholly-owned subsidiary, Gyyr, INC. experienced a 21.3% increase and the
Broadcast Division recorded a 6.0% increase in net sales for the first quarter
of fiscal 1998 when compared to the first quarter of the prior fiscal year.
The Company's decline in contract revenues in the first quarter of fiscal 1998
was primarily due to changes in government spending patterns and a transition
by the Company from certain government markets to commercial activities.
Total gross profit for the first quarter of fiscal 1998 when compared to same
period in the prior fiscal year held constant at 36.8%.
Selling, general, and administrative expenses increased 35.1% to $9.3 million
(or 23.3% of total net sales and contract revenues) in the first quarter of
fiscal 1998 as compared to $6.9 million (or 22.4% of total net sales and
contract revenues).The dollar increase in the first quarter of fiscal 1998
principally reflects the Company's efforts to expand its sales and marketing
capabilities through infrastructure growth which included higher sales
commissions associated with increased sales, as well as increased expenditures
for advertising, promotion and labor costs associated with the Company's
increased commercial sales and marketing activities.
Research and development (R&D) expenses increased 65.4% to $3.8 million (or
9.4% of total net sales and contract revenues) in the first quarter of fiscal
1998 as compared to $2.3 million ( or 7.4% of total net sales and contract
revenues) in the comparable period of the prior year. The increase in R&D
expense primarily reflects additional engineering and labor costs, consulting
fees, prototype materials costs and other costs associated with the
development, testing and preproduction costs associated with ATL's Prism
products. The increase in research and development expenses in the first
quarter of fiscal 1998 also reflects additional expenditures related to new
product development in Gyyr, INC. and Communications divisions. The Company
expects expenditures for research and development generally to increase over
time and to be
9
<PAGE>
higher during periods of new product development when significant expenditures
are incurred in preproduction activities and increased testing. The
expenditures may, therefore, continue to fluctuate as a percentage of total net
sales and contract revenues from period to period.
On March 13, 1997, the Company completed an initial public offering of
1,650,000 shares of Class A Common Stock of ATL, which reduced the Company's
beneficial ownership of ATL to 82.9%. The $203,000 minority interest
represents the ATL stockholders' portion of ATL's net income for the first
quarter of fiscal 1998. The Company has announced that it intends to
distribute to its stockholders, prior to December 31, 1997, all of its Class A
Common Stock of ATL, subject to certain conditions (including the receipt of a
favorable letter ruling from the Internal Revenue Service concerning the tax-
free nature of the distribution).
Interest expense declined approximately 43.2% to $280,000 in the first quarter
of fiscal year 1998 as compared to the same period in the prior year. The
decrease in interest expense was primarily due to overall lower average
borrowings.
The Company's income before income taxes and minority interest of $1,366,000
for the quarter ended June 30, 1997 includes $1,983,000 of income before income
taxes reported by ATL. In the previous year's first fiscal quarter ended June
30, 1996, the Company's income before income taxes of $1,651,000 included
$1,552,000 of income before income taxes reported by ATL. Net of amounts
reported by ATL, the Company's losses before income taxes and minority interest
were $617,000 in the quarter ended June 30, 1997 compared to income before
income taxes of $99,000 in the quarter ended June 30, 1997. The reduction in
the Company's income before income taxes, exclusive of amounts reported by ATL,
reflects the impact of increases in spending levels for both research and
development, and sales and marketing in the quarter ended June 30, 1997
compared to June 30, 1996.
The effective income tax rate for the first quarter of 1998 was 40% compared to
a 39% tax rate for the same period of the prior year. The increase in the
effective tax rate projected for fiscal 1998 is due to a reduction in the
effect of general business tax credits on total income tax expense. The Company
entered into a Tax Allocation Agreement with ATL effective April 1, 1996,
pursuant to which ATL will make a payment to the Company, or the Company will
make a payment to ATL, as appropriate, in an amount equal to the taxes
attributable to the operations of the Company on its consolidated federal
income tax returns and consolidated or combined state tax returns. In addition,
the Tax Allocation Agreement provides that members of the Company's
consolidated group generating tax losses after April 1, 1996, will be paid by
other members of the group which utilize such tax losses to reduce such other
members' tax liability.
Liquidity and Capital Resources
For the first quarter of fiscal 1998, the Company used $8.0 million of cash
flow in operating activities which was primarily due to a decrease in accounts
payable and accrued expenses. Payments of accounts payable primarily funded
inventory increases that occurred late in the last quarter of the prior fiscal
year in support of the continued sales growth, and the timing of large quantity
inventory receipts; mainly tape drives for ATL.
The Company has a $17.0 million bank line of credit with Imperial Bank and
Comerica Bank-California which provides for borrowings generally at the lessor
of the bank's prime rate (8.5% at June 30, 1997) or the bank's LIBOR rate plus
2.25%. Borrowings are available for general working capital purposes, and at
June 30, 1997, approximately $13.0 million was available for borrowing under
the line. The Company's borrowings under the line of credit are secured by
substantially all of the Company's assets, other than the assets of ATL. At
June 30, 1997, $3.7 million was outstanding under this line of credit.
In March 1997, ATL entered into a separate $5.0 million line of credit with
Imperial Bank which provides for borrowings generally at the lessor of the
bank's prime rate (8.5% at June 30, 1997) or the bank's LIBOR rate plus 2.25%.
No amounts were outstanding under this line of credit as of June 30, 1997.
ATL's borrowings under the line of credit are secured by substantially all of
ATL's assets.
In April 1997, ATL entered into a promissory note payable to the Company in the
original principal amount of $13.0 million representing the aggregate balance
of ATL's interest bearing advances from the Company. This note bears interest
at a rate equal to the Company's cost of borrowing (8.5% at June 30, 1997).
Principal and interest on this note are payable to the Company in sixteen equal
quarterly installments at the end of each calendar quarter commencing June 30,
1997.
10
<PAGE>
ATL entered into a lease for new facilities in Irvine, California during the
first calendar quarter of 1997. ATL began to relocate to its new facility at
the end of fiscal 1997 and completed its move in the first quarter of fiscal
1998. The Company anticipates that ATL will incur expenditures of
approximately $500,000 for relocation costs, leasehold improvements and
capital equipment for this new facility.
The Company anticipates that net cash flow generated by operating activities,
together with the net proceeds of ATL's initial public offering and funds
available under the Company's line of credit will be adequate to enable the
Company to execute its operating plans and meet its obligations on a timely
basis for at least the next twelve months.
11
<PAGE>
RISK FACTORS
The Company's business is subject to a number of risks, some of which are
discussed below. Other risks are presented elsewhere in this Report. The
following risks should be considered carefully in addition to the other
information contained in this Report in evaluating the Company and its business
before purchasing the shares of the Company's Common Stock.
Fluctuations in Quarterly Operating Results. The Company has experienced wide
fluctuations in quarterly and annual operating results in the past and may
continue to experience fluctuations 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; the expenditure of substantial funds for
research and development for its subsidiaries and divisions; changes in pricing
policies by the Company, its suppliers or its competitors and increased price
competition; 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
networked computing market and the other markets in which the Company operates;
the reduction in revenues from government programs; the relatively thin level of
backlog at any given time; the mix of sales among the Company's channels;
deferrals of customer orders in anticipation of new products, applications or
product enhancements; currency fluctuations; and general economic and market
conditions. Moreover, the Company's sales in any quarter typically consist of a
relatively small number of large 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. The Company's growth in revenues in recent periods may
not be sustainable and may not be indicative of future operating results, and
there can be no assurance that
12
<PAGE>
the Company will continue to 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 market price of the Company's securities would probably be
materially and adversely affected.
Dependence on Sole Source Suppliers. The Company purchases numerous parts,
supplies and other components used in its products from various independent
suppliers, some of whom are the sole supplier for certain parts and components.
ATL currently derives substantially all of its revenues from the sale of its DLT
based products and related services. Quantum Corporation, which has the
exclusive worldwide manufacturing rights for the DLT technology, is the sole
supplier of the DLT tape drives used in ATL's products. Quantum has informed ATL
that the growth in the demand for the DLT7000 drives will result in continued
limitations in the availability of these drives. ATL does not expect that its
indicated allocation of DLT7000 drives will have a material adverse effect on
its results of operations in the near future. The foregoing statement is
intended to be a forward-looking statement and actual results may differ as a
result of the factors set forth in this paragraph. There can be no assurance
that Quantum will not revise its allocation to ATL or that Quantum will
otherwise continue to provide an adequate supply of the DLT7000 drives. The
Company also currently relies on single supplier for the principal component of
the GYYR's time-lapse videotape cassette recorders. The Company has not been
able to secure any guarantee of the future supply of its sole sourced
components. The disruption or termination of the supply of any of the Company's
source sourced components for any reason would have a material adverse effect on
the Company's business, financial condition and results of operations.
Rapid Technological Change; Effect of New Product Introductions. The markets
served by the Company are characterized by rapid technological advances,
downward price pressure in the marketplace as technologies mature, changes in
customer requirements, frequent new product introductions and enhancements, and
evolving industry standards. The Company's business requires substantial ongoing
research and development efforts and expenditures, and its future success will
depend on its ability to enhance
13
<PAGE>
its current products, reduce product costs and develop and introduce new
products which incorporate the latest technological advancements in hardware,
storage media, operating system software and applications software in response
to evolving customer requirements. The Company's failure to anticipate or
respond adequately to technological developments and changing customer
requirements, the occurrence of significant delays in new product development or
introduction or the failure of any new products to gain market acceptance could
impair the Company's competitiveness and could materially and adversely affect
the Company's business, financial condition and results of operations. 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. To the extent
new products are introduced, they may contain undetected design faults and
software errors, or "bugs," when first released by the Company that, despite
testing by the Company, are discovered only after a product has been installed
and used by customers. Although the Company has not experienced any material
adverse effect resulting from any such faults or errors to date, there can be no
assurance that faults or errors in the Company's existing products or in new
products introduced by the Company will not be discovered in the future, causing
delays in product introduction and shipments or requiring design modifications
that could adversely affect the Company's competitive position and results of
operations.
Competition. The Company competes in each of its markets with numerous other
companies, many of which have far greater name recognition and financial,
technological, marketing and customer service resources than the Company and may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or devote greater resources to the development,
promotion, sale and support of their products than the Company. The principal
competitive factors in the markets in which the Company participates are product
quality and performance, price, reliability, upgradeability, service and
technical support. There can be no assurance that the Company will be able to
compete effectively in the markets for its products. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
14
<PAGE>
share, any of which could have a material adverse affect upon the Company's
business, operating results and financial condition.
Risks Associated with International Sales. International product sales
represented approximately 12% and 17% of the Company's total net sales and
contract revenues during fiscal 1996 and 1997, respectively. 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 primarily 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. The Company does not
engage in any transactions as a hedge against risks of loss due to foreign
currency fluctuations. There can be no assurance that such factors will not have
a material adverse effect on the Company's future international sales and,
consequently, the Company's business, operating results and financial condition.
Furthermore, as the Company increases its international sales, its total
revenues may also be affected to a greater extent by seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world.
Dependence on Key Personnel. The Company's future performance depends to a
significant extent on its senior management and other key employees, in
particular Joel Slutzky, the Company's Chief Executive Officer, and Kevin C.
Daly, Ph.D., the Chief Executive Officer of ATL. The loss of the services of
either Mr. Slutzky or Dr. Daly would have a material adverse effect on the
Company's development and marketing efforts. The Company's future success will
also depend in large part upon its ability to attract, retain and motivate
highly skilled employees. In addition, the Company
15
<PAGE>
is actively seeking to retain a successor chief financial officer for ATL.
Competition for such employees, particularly development engineers and an
experienced chief financial officer, is intense, and there can be no assurance
that the Company will be able to continue to attract and retain sufficient
numbers of such highly skilled employees. The Company's inability to attract and
retain additional key employees or the loss of one or more of its current key
employees could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
ability to compete effectively depends in part on its ability to develop and
maintain proprietary aspects of its technology which the Company attempts to
protect with a combination of patent, copyright, trademark and trade secret
laws, employee and third party nondisclosure agreements and similar means. 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, that future patents will be issued, 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. Moreover, 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
16
<PAGE>
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.
Volatility of Stock Price. The trading price of the Company's Common Stock could
be subject to wide fluctuations in response to quarterly variations in operating
results, shortages announced by suppliers, announcements of technological
innovations or new products, applications or product enhancements by the Company
or its competitors, changes in financial estimates by securities analysts and
other events or factors. In addition, the stock market has experienced
volatility which has particularly affected the market prices of equity
securities of many high technology companies and which often has been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's securities.
Concentration of Ownership. As of August 12, 1997, the Company's officers and
directors beneficially owned a majority of the total combined voting power of
the outstanding shares of Class A Common Stock and Class B Common Stock. As a
result of their stock ownership, management will be able to significantly
influence the election of the Company's directors and the outcome of corporate
actions requiring stockholder approval, such as mergers and acquisitions,
regardless of how other stockholders of the Company may vote. This concentration
of voting control may have a significant effect in delaying, deferring or
preventing a change in management or change in control of the Company and may
adversely affect the voting or other rights of other holders of Common Stock.
Pending Distribution. The Company has announced its intention to distribute to
its stockholders all of its shares of ATL Class A Common Stock prior to December
31, 1997, subject to the satisfaction or waiver of certain conditions (including
the receipt by the Company of a favorable tax ruling from the Internal Revenue
Service confirming the tax-free nature of the Distribution). No assurance can be
given, however, that such conditions will be satisfied or waived, or that the
Distribution will occur. For the Distribution to occur, the Board of Directors
of the Company must conclude, at the time of the Distribution, that the
Distribution is in the best interest of the stockholders
17
<PAGE>
of the Company. Failure to undertake the Distribution could materially and
adversely affect the market price of the Company's securities.
Anti-Takeover Effect of Charter Provisions, Bylaws and Stock Structure. The
Company has two classes of Common Stock which are substantially identical other
than with respect to voting power. The Class A Common Stock offered hereby
entitles the holder to 1/10th vote per share and Class B Common Stock entitles
the holder to one vote per share, with concentration of ownership of the Class B
Common Stock in the Company's officers and directors and their affiliates. In
addition, the Company's Board of Directors is elected annually on a split vote
basis, with the holders of Class A Common Stock currently being entitled to
elect two of the directors and holders of the Class B Common Stock currently
being entitled to elect the remaining six directors. These provisions could have
the effect of discouraging a proxy contest or making it more difficult for a
third party acquiring a substantial block of the Company's Common Stock to
effect a change in management and control of the Company. Such provisions also
could limit the price that investors might be willing to pay in the future for
shares of the Company's Common Stock.
The Board of Directors of the Company is authorized to issue, without
stockholder approval, up to 2,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences, as well as additional shares of
Common Stock, which could adversely affect the voting power or other rights of
the holders of Class A Common Stock. Although the Company has no current plans
to issue any shares of Preferred Stock or additional shares of Common Stock
other than the Class A Common Stock offered hereby, the future issuance of
Preferred Stock or Common Stock or of rights to purchase Preferred Stock or
Common Stock could be used to discourage an unsolicited acquisition proposal.
18
<PAGE>
ODETICS, INC.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company brought an action against Storage Technology Corporation
("StorageTek") in the Eastern District Court of Virginia alleging
that StorageTek had infringed the Company's patent covering robotics
tape cassette handling systems (United States Patent No. 4,779,151).
StorageTek counterclaimed alleging that the Company infringed several
of StorageTek's patents. Prior to trial, the court dismissed two of
the infringement claims against the Company and the third claim was
resolved between the parties. In January 1996, the jury determined
that the patent claims were not infringed under the doctrine of
equivalents based upon a claim construction defined by the court
prior to the trial. The jury also concluded that the Company's patent
was not invalid. In June 1997, the United States Court of Appeals for
the Federal Circuit vacated the lower court's claim construction and
findings of noninfringement of the Company's patent. The appellate
court remanded the case for consideration of infringement under a
proper claim construction. In August 1997, the appellate court denied
a petition for rehearing requested by StorageTek.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed
for the three-month period ended
June 30, 1997.
19
<PAGE>
ODETICS, INC.
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.
ODETICS, INC.
(Registrant)
By /s/ GREGORY A. MINER
---------------------------------------
Gregory A. Miner
Vice President, Chief Financial Officer
By /s/ GARY SMITH
---------------------------------------
Gary Smith
Vice President, Controller
(Principal Accounting Officer)
Date August 13, 1997
----------------
20
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