<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 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 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
of incorporation or organization) Identification No.)
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 address 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 11, 1998
Class A Common Stock - 6,202,778 shares.
Class B Common Stock - 1,062,041 shares.
1
<PAGE>
INDEX
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
- ------------------------------- ----
<S> <C>
ITEM 1. CONSOLIDATED STATEMENTS OF INCOME FOR 3
THE THREE MONTHS AND NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1997 4
AND DECEMBER 31, 1997 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6
THE NINE MONTHS ENDED DECEMBER 31, 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 1. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 17
SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE>
PART 1 FINANCIAL INFORMATION
ODETICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- ------------------
1996 1997 1996 1997
-------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Net sales and contract revenues:
Net sales $18,878 $22,942 $50,961 $63,467
Contract revenues 2,018 1,362 7,291 4,415
------- -------- ------- -------
Total net sales and contract revenue 20,896 24,304 58,252 67,882
Costs and expenses:
Cost of sales 12,398 15,076 34,663 42,626
Cost of contract revenues 1,166 794 3,843 2,475
Selling, general and administrative expense 4,741 5,888 13,948 18,267
Research and development expense 2,017 2,352 5,629 6,661
Interest expense, net 144 175 152 291
------ ------- ------ -------
20,466 24,285 58,235 70,320
------ ------- ------- -------
Income (loss) from continuing operations before taxes 430 19 17 (2,438)
Income taxes (benefit) 160 8 (39) (975)
------- ------- ------- --------
Net income (loss) from continuing operations 270 11 56 (1,463)
Income (loss) from discontinued operations,
net of income taxes 504 (217) 2,813 2,089
------ ------ ------ -------
Net income (loss) $774 ($206) $2,869 $626
====== ====== ====== =======
Earnings (loss) per common share:
Continuing operations $0.04 $0.00 $0.01 ($0.22)
Discontinued operations $0.08 ($0.03) $0.45 $0.31
------- ------ ------- -------
Earnings (loss) per common share $0.12 ($0.03) $0.46 $0.09
======= ======= ======= =======
Earnings (loss) per common share assuming dilution:
Continuing operations $0.04 $0.00 $0.01 ($0.22)
Discontinued operations $0.08 ($0.03) $0.43 $0.31
------- ------- ------ -------
Earnings (loss) per common share
- assuming dilution $0.12 ($0.03) $0.44 $0.09
====== ======= ====== ======
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1997 1997
(unaudited)
--------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash $1,865 $771
Trade accounts receivable, net 17,127 14,509
Current portion of ATL note receivable 3,249 3,249
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,922 2,028
Inventories:
Finished goods 498 420
Work in process 2,968 3,202
Materials and supplies 12,184 13,804
-------- --------
Total inventories 15,650 17,426
Prepaid expenses 978 1,264
Deferred income taxes 2,798 3,223
-------- --------
Total current assets 43,589 42,470
Property, plant and equipment
Land 2,090 2,090
Buildings and improvements 17,642 18,347
Equipment, furniture and fixtures 25,202 28,699
-------- --------
44,934 49,136
Less accumulated depreciation (23,824) (26,306)
-------- --------
Net property, plant and equipment 21,110 22,830
Net assets of discontinued operations 8,865 0
Long term ATL note receivable less current 9,748 7,582
Other assets 2,738 11,784
-------- --------
Total assets $86,050 $84,666
======== ========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1997 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
--------- -----------
<S> <C> <C>
Current liabilities
Trade accounts payable $ 8,802 $ 8,335
Accrued payroll and related 5,306 3,406
Accrued expenses 1,788 5,601
Income taxes payable 0 0
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,690 1,318
Current portion of long-term debt 1,721 1,605
--------- --------
Total current liabilities 20,307 20,265
Long-term debt, less current portion 11,860 16,791
Deferred income taxes 540 258
Minority Interest 1,515 ---
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; 6,202,778 shares of
Class A and 1,062,041 shares of
Class B issued and outstanding at
December 31, 1997 - $.10 par value 638 726
Paid-in capital 38,927 46,594
Note receivable from employees 0 (3,456)
Foreign currency translation 52 60
Retained earnings 12,211 3,428
--------- --------
Total stockholders' equity 51,828 47,352
--------- --------
Total liabilities and stockholders' equity $ 86,050 $84,666
========= ========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1996 1997
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss from continuing operations $56 ($1,463)
Adjustments to reconcile net income to net cash
provided by (used) in continuing operating activities:
Depreciation and amortization 2,169 2,488
Provision for inventory reserves 450 822
Provision for losses on accounts receivable 99 99
Provision (benefit) for deferred income taxes 198 (282)
Net proceeds from settlement of litigation 5,860 0
Gain (loss) on sale of assets (186) 13
Foreign currency translation gain 105 8
Changes in operating assets and liabilities (5,758) (5,905)
------------ -------------
Net cash provided by (used) in continuing operating activities 2,993 (4,220)
INVESTING ACTIVITIES
Purchases of property, plant, and equipment, net (1,907) (2,773)
Purchase of net assets of aquired business 0 (2,597)
Repayment of long term note receivable (1,314) 2,166
------------ -------------
Net cash used in investing activities (3,221) (3,204)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term borrowings 41,940 36,051
Principal payments on line of credit, long-term
debt and capital lease obligations (44,296) (31,236)
Proceeds from sale of common stock 1,520 1,515
------------ -------------
Net cash provided by financing activities (836) 6,330
------------ -------------
Increase (decrease) in cash (1,064) (1,094)
Cash at beginning of year 1,142 1,865
------------ -------------
Cash at December 31 $78 $771
============ =============
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
ODETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
- ------
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of normal
recurring accruals except for adjustments to present the Company's
former subsidiary, ATL Products, Inc. ("ATL") as a discontinued
operation (See Note 4), necessary to present fairly the consolidated
financial position of Odetics, Inc. (the "Company") as of December 31,
1997 and the consolidated results of operations and cash flows for the
three month and nine month periods ended December 31, 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 and nine month periods ended
December 31, 1997 are not necessarily indicative of those to be
expected for the entire year. The accompanying financial statement
should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended March 31, 1997 filed with the Securities and
Exchange Commission.
Note 2 - Income Taxes
- ------
Income tax expense for the three month and nine month periods ended
December 31, 1996 and 1997 have 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, 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, December 31,
1997 1997
-------- --------
<S> <C> <C>
Line of credit $ 2,100 $ 8,200
Mortgage note 10,171 9,465
Contracts payable 1,310 731
------- ------
13,581 18,396
Less current portion 1,721 1,605
------- ------
$11,860 $16,791
======= =======
</TABLE>
7
<PAGE>
Note 4 - On March 13, 1997, ATL completed an initial public offering of
- ------
1,650,000 shares of its Class A Common Stock, at an initial public
offering price of $11 per share. Following the Offering, the Company's
beneficial ownership interest in ATL was reduced to 82.9%. On October
31, 1997, the Company completed a tax-free spin-off of its remaining
interest in ATL to the Company's stockholders, pursuant to which each
holder of the Company's Class A and Class B Common Stock (collectively
the "Common Stock") as of October 31, 1997, received approximately 1.1
shares of Class A Common Stock of ATL for each share of the Company's
Common Stock then held. In connection with the spin-off, the financial
statements of the Company have been restated to reflect continuing
operations and the discontinued operations of ATL. The ATL net sales
included in the discontinued operations for the periods being reported
are as follows:
<TABLE>
<CAPTION>
(in thousands)
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Quarter Ended $15,412 $ 5,953
Nine Months Ended $42,452 $47,404
</TABLE>
NOTE 5 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 doctrines 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. The case has been
returned to the Federal District Court for retrial.
NOTE 6 Earnings per Share
- ------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement
128 replaced 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. All earnings per share amounts for
all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
8
<PAGE>
ODETICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto contained in this
Report and in the Annual Report on Form 10-K of 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. Such forward-looking statements include, among other
things, statements concerning projected revenues, funding and cash
requirements, supply issues, the Company's incubator strategy, and involve
a number of risks and uncertainties, including without limitation, those
set forth at the end of this Item 2 under the caption "Risk Factors." The
Company's actual results may differ materially from any forward-looking
statements discussed herein. 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
General
On October 31, 1997, the Company completed the spin-off of its 82.9%
interest in ATL by distributing the Company's 8,005,000 shares of Class A
Common Stock to the Company's stockholders of record on October 31, 1997.
In connection with the spin-off, the Company's financial statements have
been restated to reflect the continuing operations and discontinued
operations. Discontinued operations reflect the Company's interest in the
operations of ATL for the periods presented.
Net Sales and Contract Revenues
Net sales and contract revenues consist of (i) sales of products and
services to commercial customers ("net sales") and (ii) 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").
Total net sales and contract revenues increased 16.3% to $24.3 million for
the three month period ended December 31 1997, compared to $20.9 million in
the corresponding period of the prior fiscal year, and increased 16.5% to
$67.9 million for the nine month period ended December 31, 1997 compared to
$58.3 million in the corresponding period of the prior fiscal year. The
increases in total net sales and contract revenues in both the three and
nine month periods presented reflect the net impact of an increase in net
sales which was offset by a decrease in contract revenues for each period
presented. As the Company has continued to focus on commercial markets, it
has experienced a decline in revenue contribution from agencies of the
United States Government or its prime contractors, and it has experienced a
decline in contract revenues relative to revenues derived from commercial
customers.
Net sales increased 21.5% for the three month period ended December 31,
1997 compared to the previous fiscal year. Net sales increased 24.5% for
the nine month period December 31, 1997 compared to the corresponding
period of the prior fiscal year. The Company experienced
9
<PAGE>
increased net sales for the three and nine month periods in its Gyyr Inc.
subsidiary ("Gyyr"), its Telecom Division ("Telecom"), and its Intelligent
Transportation Systems ("ITS") business. Gyyr net sales increased in the
three and nine month periods of the current fiscal year largely as a result
of growth in its multiplexer products and increased sales of time lapse
video recorders. The increase in Gyyr sales also reflects the revenue
contribution related to its acquisition of Intelligent Control Inc. ("ICI")
in October 1997. The increase in the revenues of Telecom reflects increased
sales of timing and synchronization products to a significant customer,
LGIC of Korea. The increase in net sales in the Company's ITS business
reflects the revenue contribution related to the acquisition of the
transportation systems business acquired from Rockwell Inc. in the first
quarter of the current fiscal year.
The increase in Gyyr, Telecom, and ITS noted above was offset by decreased
sales revenue for the three and nine month periods in the Company's
Broadcast Division ("Broadcast"). The decrease principally reflects
softness in the demand for the Broadcast products in Asia and Latin America
coupled with the delay in introduction of Broadcast's new "Roswell" product
offering.
Gross Profit
Gross profit as a percentage of net sales was unchanged at 34.3% for the
three months ended December 31, 1997 and 1996, and increased to 32.8% for
the nine month period ended December 31, 1997 compared to 32.0% for the
same period in the prior fiscal year. The Company's Gyyr subsidiary and
Telecom businesses experienced improved gross profit performance in the
three and nine month periods ended December 31, 1997 compared to the
corresponding periods of the previous fiscal year primarily due to changes
in product mix toward higher margin products, improved efficiencies gained
on increased sales volume, and improved margin contribution from the
acquisition of ICI by Gyyr in October 1997. Improvements in gross profit
performance in Gyyr and Telecom were offset by declines in margin
performance in Broadcast which resulted from an unfavorable sales mix and
higher unabsorbed indirect manufacturing costs experienced on lower sales
volume. Gross profit as a percentage of contract revenues decreased to
41.7% in the three months ended December 31, 1997 from 42.2% in the same
period in the prior fiscal year and decreased to 43.9% for the nine month
period ended December 31, 1997 compared to 47.3% in the same period in the
prior fiscal year. The decrease in gross profit as a percentage of contract
revenues is principally due to the lower absorption of fixed manufacturing
overhead costs on decreased sales volume.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 24.2% to $5.9 million
(or 24.2% of total net sales and contract revenues) in the three months
ended December 31, 1997 compared to $4.7 million (or 22.7% of total net
sales and contract revenues) in the corresponding period of the prior
fiscal year. Selling, general and administrative expense for the nine month
period ended December 31, 1997 increased 31.0% to $18.3 million (or 26.9%
of total net sales and contract revenues) compared to $13.9 million (or
23.9% of total net sales and contract revenues) for the same period in the
prior fiscal year. The increase in selling, general, and administrative
expenses in absolute dollars and as a percent of net sales and contract
revenues in the three and nine months periods ended December 31, 1997
compared to the previous fiscal year periods relates primarily to
investments in sales and marketing across all divisions, domestically and
internationally, to support growth. The increases also relate to the
acquisition of ICI and the transportation infrastructure business of
Rockwell Inc. noted above. Increased spending is widely dispersed among the
operating divisions and relates primarily to administrative and sales
labor, sales commissions on higher sales volume, advertising and promotion
to support new products and markets, and costs for international expansion
incurred for Gyyr, Broadcast, Telecom, and ITS.
Research and Development Expense
10
<PAGE>
Research and development expense increased 16.6% to $2.4 million (or 9.7%
of total net sales and contract revenues) in the three month period ended
December 31, 1997 compared to $2.0 million (or 9.7% of total net sales and
contract revenues) in the corresponding period the prior fiscal year.
Research and development expense for the nine month period ended December
31, 1997 increased 18.3% to $6.7 million (or 9.8% of total net sales and
contract revenues) compared to $5.6 million (or 9.7% of total net sales and
contract revenues) in the corresponding period of the fiscal 1997. The
Company experienced increased spending to support new product development
in its Gyyr, Broadcast, and Telecom operations. For competitive reasons,
the Company closely guards the confidentiality of specific development
projects. Spending for research and development includes both new product
development as well as product line extension. The increase in new product
development expenses relates primarily to development labor and related
benefits, prototype material cost, and consulting fees. The acquisitions of
ICI and the transportation infrastructure business of Rockwell Inc. did not
materially impact the increases in current year research and development
expenses. The Company expects expenditures for research and development to
generally increase over time and to be 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.
Interest Expense
Interest Expense -net, reflects interest income and interest expense
as follows:
<TABLE>
<CAPTION>
(in thousands)
Three Months Nine Months
Ended Dec. 31 Ended Dec. 31
------------- -------------
1996 1997 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Interest Expense $ 515 $ 416 $1452 $1093
Interest Income 371 241 1300 802
----- ----- ----- -----
Interest Expense - net $ 144 $ 175 $ 152 $ 291
===== ===== ===== =====
</TABLE>
Interest expense primarily reflects interest on the Company's line of
credit borrowings and mortgage interest. The reduction in interest expense
for the three month and nine month periods of the current fiscal year
reflects a reduction in the Company's borrowings on its line of credit
facility. Interest income is derived primarily from the note receivable due
to the Company from ATL, its previously owned subsidiary. The reduction in
interest income in the three month and nine month periods of the current
fiscal year primarily reflects the $6.75 million payment by ATL in March
1997 which reduced ATL's interest bearing advances from the Company and was
used to reduce the Company's borrowings under its line of credit.
Income Taxes
The Company's income tax benefit rate for the nine month period of fiscal
1998 was 40% resulting primarily from an ability to offset the loss from
Odetics' continuing operation against the income of ATL during fiscal 1998
prior to its spin-off, which was effective October 31, 1997. The Company
recognized a tax benefit of $39,000 for the comparable period of fiscal
1997 resulting from utilization of tax credits related to Odetics'
continuing operations. 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
11
<PAGE>
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
On October 31, 1997, the Company completed the spin-off of its holdings in
ATL (Note 4). The effect of the spin-off was to reduce total assets of the
Company by $11.6 million, representing the net assets of the discontinued
operations reported as of September 30, 1997.
On January 23, 1998, the Company announced its planned repurchase of up to
1.0 million shares of its common stock in the open market from time to time
at prices to be determined at the time of repurchase. As of February 17,
1998, the Company had repurchased 50,000 shares pursuant to this plan, at
an aggregate net cost to the Company of approximately $240,000. There can
be no reassurance that the Company will repurchase the entire 1.0 million
shares, and this repurchase program may be discontinued at anytime in the
sole discretion of the Board of Directors.
In the nine months ended December 31, 1997, the Company incurred negative
cash flow from operating activities of $4.2 million. The Company generated
earnings before depreciation, amortization, and inventory reserves of $1.8
million in the first nine months of the fiscal year, and used $2.4 million
in cash to fund increased inventories, and $3.9 million to pay down current
liabilities (principally accounts payable). The Company has experienced
improving trends with respect to inventory turnover and days sales in
accounts receivable, and the negative cash flow from operating activities
during the nine months ended December 31, 1997 is consistent with the
operating losses incurred during the period, coupled with the aggressive
investment activity of the Company's business.
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 December 31, 1997) or the bank's
LIBOR rate plus 2.25%. Borrowings are available for general working
capital purposes, and at December 31, 1997, $8.2 million was outstanding
under this line of credit, and approximately $8.5 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.
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
December 31, 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.
The Company anticipates that net cash flow generated by operating
activities and payments under the note receivable from ATL, together with
funds available under the Company's line of credit will be adequate and
enable the Company to execute its current operating plans and meet its
obligations on a timely basis for at least the next twelve months.
12
<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 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 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. In particular, the Company 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.
Uncertainty of Incubator Strategy. The Company has initiated a strategy to
nurture its business divisions with the goal of conducting additional
initial public offerings. The Company's ability to complete an initial
public offering of any of its divisions will depend upon numerous factors,
including, without limitation, the overall performance of such division,
its growth potential, management team, market size, customer base, product
line and results of operations, as well as general economic and market
conditions. There can be no assurance that the Company will be able to
complete a successful initial public offering of any of its divisions in
the near future, if at all.
13
<PAGE>
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 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 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 36% and 33% of the Company's total net sales and
contract revenues during the first nine months of fiscal 1997 and 1998,
respectively. The Company's products sold by its Telecom operations are
sold principally to LGIC of Korea. As a result of economic uncertainty in
Asia, particularly Korea, the Company's sales in the region could be
subject to decline. 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
14
<PAGE>
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. The loss
of the services of Mr. Slutzky or certain key employees 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 employees, particularly development engineers, 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 has been necessary in the past and 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.
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 October 31, 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
15
<PAGE>
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.
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 Company's Class A
Common Stock 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 Class B 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 Class B Common Stock, the future issuance of Preferred
Stock or Class B Common Stock or of rights to purchase Preferred Stock or
Class B Common Stock could be used to discourage an unsolicited acquisition
proposal.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date
code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, in
less than three years, 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.
Although the Company's core products are designed to be Year 2000
compliant, there can be no assurance that such products contain all
necessary date code changes. The Company is exploring changes to its
existing information systems to become Year 2000 compliant. The Company
will be required to expend additional resources to make such corrections to
its products and information systems, which corrections may not be able to
be made on a timely basis, if at all. The Company believes that the
purchasing patterns of customers and potential customers may be affected by
Year 2000 issues in a variety of ways. Many companies are expending
significant resources to correct or patch 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 system 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>
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. The case has been
returned to the Federal District Court for retrial.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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 nine month period ended
December 31, 1997.
17
<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 February 17, 1998
--------------------
18
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