<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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
----------
ODETICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2588496
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 South Manchester Avenue 92802
Anaheim, California (Zip Code)
(Address of principal executive office)
(714) 774-5000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all documents
and 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 November 11, 1999
Class A Common Stock - 8,061,734 shares.
Class B Common Stock - 1,058,641 shares.
1
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
- -------------------------------- ----
<S> <C>
ITEM 1. CONSOLIDATED STATEMENTS OF OPERATIONS FOR 3
THE THREE MONTHS AND SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1999 4
AND SEPTEMBER 30, 1999 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6
THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AND
1999 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II OTHER INFORMATION
- -------------------------
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 22
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
</TABLE>
In this Report, "Odetics," the "Company," "we," "us," and "our"
collectively refers to Odetics, Inc. and its subsidiaries.
2
<PAGE>
PART I FINANCIAL INFORMATION
ODETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1999 1998 1999
Net sales and contract revenues: ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 19,283 $ 15,334 $ 36,340 $ 32,704
Contract revenues 2,840 4,838 5,562 9,543
------------ ------------- ------------- -----------
Total net sales and contract revenues 22,123 20,172 41,902 42,247
Costs and expenses:
Cost of sales 13,345 11,806 25,891 24,009
Cost of contract revenues 1,712 3,812 3,527 6,972
Selling, general and administrative expense 7,718 8,493 15,711 17,352
Research and development expense 2,763 4,329 5,367 8,208
Interest expense, net 476 750 834 1,367
------------ ------------- ------------- -----------
26,014 29,190 51,330 57,908
------------ ------------- ------------- -----------
Loss from continuing operations (3,891) (9,018) (9,428) (15,661)
Income taxes (benefits) 0 (6,575) 0 (6,575)
------------ ------------- ------------- -----------
Net loss ($3,891) ($2,443) ($9,428) ($9,086)
============ ============= ============= ===========
Basic and diluted loss per share ($0.54) ($0.27) ($1.30) ($1.00)
============ ============= ============= ===========
Weighted average number of shares outstanding 7,271 9,068 7,268 9,049
============ ============= ============= ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1999
--------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash $ 787 $ 1,913
Trade accounts receivable, net 18,889 18,067
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,423 2,368
Inventories:
Finished goods 1,101 1,220
Work in process 749 799
Materials and supplies 14,135 14,950
---------------- ----------------
Total inventories 15,985 16,969
Prepaid expenses 1,295 1,123
Income taxes receivables 531 302
Deferred income taxes 376 6,951
---------------- ----------------
Total current assets 40,286 47,693
Property, plant and equipment:
Land 2,060 2,060
Buildings and improvements 18,674 18,739
Equipment, furniture and fixtures 31,303 32,202
---------------- ----------------
52,037 53,001
Less accumulated depreciation (29,561) (31,472)
---------------- ----------------
Net property, plant and equipment 22,476 21,529
Capitalized software costs, net 7,667 7,199
Other Assets 10,926 10,467
---------------- ----------------
Total Assets $ 81,355 $ 86,888
================ ================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ODETICS, INC.
CONSOLIDATED BALANCE SHEETS (cont'd)
(in thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1999
--------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current Liabilities
Trade accounts payable $ 10,454 $ 15,980
Accrued payroll and related 5,441 5,042
Accrued expenses 1,933 2,180
Contractual loss accrual 3,892 3,569
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,276 1,125
Current portion of long-term debt 2,074 2,110
--------------- ----------------
Total current liabilities 25,070 30,006
Revolving line of credit 10,997 16,392
Long-term debt - less current portion 8,965 13,015
Deferred income taxes 0 0
Stockholders' equity
Preferred stock, authorized 2,000,000 shares; -- --
none issued
Common stock, authorized 10,000,000 shares of 901 908
Class A and 2,600,000 shares of Class B;
8,017,363 shares of Class A and 1,058,641 shares
of Class B issued and outstanding at
September 30, 1999 - $.10 par value
Paid-in capital 59,579 59,814
Treasury stock (240) (240)
Note receivable from associates (96) (101)
Retained earnings (23,913) (33,000)
Accumulated other comprehensive income 92 93
--------------- ----------------
Total stockholders' equity 36,323 27,474
--------------- ----------------
Total liabilities and stockholders' equity $ 81,355 $ 86,888
=============== ================
</TABLE>
See notes to consolidated financial statements.
5
s
<PAGE>
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
--------------------------------
1998 1999
------------- -----------
<S> <C> <C>
Operating activities
Net income (loss) $ (9,428) $(9,086)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,314 2,844
Provision for losses on accounts receivable 132 --
Provision (benefits) for deferred income taxes 251 (6,345)
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable 1,688 822
(Increase) Decrease in net costs and
estimated earnings in excess of billings 543 (96)
(Increase) Decrease in inventories 3,895 (984)
(Increase) Decrease in prepaids and other assets 1,906 265
Increase (Decrease) in accounts payable and
accrued expenses (3,810) 5,047
------------- -------------
Net cash used in operating activities (2,509) (7,533)
Investing activities
Purchases of property, plant and equipment (1,588) (964)
Software development costs (2,434) (102)
Cash received on note receivable 10,019 --
------------- -------------
Net cash provided by (used in) investing activities 5,997 (1,066)
Financing activities
Proceeds from revolving line of credit and
long-term borrowings 22,538 16,727
Principal payments on line of credit, long-term
debt and capital lease obligations (26,535) (7,244)
Proceeds from issuance of common stock (4) 242
------------- -------------
Net cash (used in) provided by financing activities (4,001) 9,725
------------- -------------
Increase (decrease) in cash (513) 1,126
Cash at beginning of year 1,131 787
------------- -------------
Cash at September 30 $ 618 $ 1,913
============= =============
</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, necessary to present fairly the consolidated
financial position of Odetics, Inc. as of September 30, 1999 and the
consolidated results of operations and cash flows for the three and six
month periods ended September 30, 1998 and 1999. 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 and six month periods ended September 30, 1999 are not
necessarily indicative of those to be expected for the entire year.
The accompanying financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K/A for the year ended
March 31, 1999 filed with the Securities and Exchange Commission.
Note 2- Income Taxes
------
Income tax expense (benefit) for the three and six month periods ended
September 30, 1998 and 1999 has been provided at the estimated
annualized effective tax rates based on the estimated income tax
liability or assets 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. The Company did not provide income tax benefit for
the losses incurred in fiscal 1998 due to the uncertainty as to the
ultimate realization of the benefit at that time.
Note 3- Long-Term Debt
------
<TABLE>
<CAPTION>
(in thousands)
March 31, September 30,
1999 1999
-------- --------
<S> <C> <C>
Mortgage note 8,173 7,612
Contracts payable 2,866 7,513
------- -------
11,039 15,125
Less current portion 2,074 2,110
------- -------
$8,965 $13,015
======= =======
</TABLE>
7
<PAGE>
NOTE 4- Legal Proceedings
------
On October 11, 1999, Odetics settled its litigation with Storage
Technology Corporation through an agreement for Storage Technology
Corporation to pay license fees to Odetics of $100 million. Odetics
will realize a gain of approximately $38 million in the quarter ended
December 31, 1999 as a result of the settlement, and expects to
realize additional gains of $10 million in each of the quarters ended
September 30, 2000 and 2001.
NOTE 5- Comprehensive Income
------
The components of comprehensive income (loss) for the three months and
six months ended September 30, 1998 and 1999 are as follows: (in
thousands)
<TABLE>
<CAPTION>
Three Months Six Months
------------------- ------------------
1998 1999 1998 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(3,891) $(2,443) $(9,428) $(9,086)
Foreign currency translation adjustment (94) (109) (78) 1
------- ------- ------- -------
Comprehensive income (loss) $(3,985) $(2,552) $(9,506) $(9,085)
======= ======= ======= =======
</TABLE>
NOTE 6- Business Segment Information
- ------
The Company operates in three reportable segments: intelligent
transportation systems, video products, which includes products for
the television broadcast and video security markets, and
telecommunications. Selected financial information for the Company's
reportable segments for the three month and six month periods ended
September 30, 1998 and 1999 follows: (in thousands)
<TABLE>
<CAPTION>
Intelligent Video Telecom
Transportation Products Products Total
-------------- -------- -------- -----
<S> <C> <C> <C> <C>
Three months ended 9/30/98
Revenue from external customers 2,402 12,843 4,106 19,351
Intersegment revenues 0 1,943 18 1,961
Segment income (loss) (1,081) (304) (28) (1,413)
Three months ended 9/30/99
Revenue from external customers 6,108 9,882 2,061 18,051
Intersegment revenues 0 1,337 24 1,361
Segment income (loss) (768) (3,380) (1,804) (5,952)
</TABLE>
8
<PAGE>
The following reconciles segment income to consolidated income before
income taxes (in thousands):
<TABLE>
<CAPTION>
3 months ended 3 months ended
Sept. 30, 1998 Sept. 30, 1999
------------------- -------------------
<S> <C> <C>
Revenue
Total revenues for reportable segments 21,312 19,412
Non-reportable segment revenues 2,772 2,121
Other revenues 0 0
Elimination of intersegment sales (1,961) (1,361)
---------- ----------
Total consolidated revenues 22,123 20,172
Total loss for reportable segments (1,413) (5,952)
Other profit or loss (851) (534)
Unallocated amounts:
Corporate and other expenses (1,150) (1,779)
Special charge 0 0
Interest expense (477) (753)
---------- ----------
Loss before income taxes (3,891) (9,018)
</TABLE>
<TABLE>
<CAPTION>
Intelligent Video Telecom
Transportation Products Products Total
-------------- -------- -------- -----
<S> <C> <C> <C> <C>
Six months ended 9/30/98
Revenue from external customers 5,917 24,816 7,419 38,152
Intersegment revenues 0 2,488 27 2,515
Segment income (loss) (2,132) (1,512) (977) (4,621)
Six months ended 9/30/99
Revenue from external customers 11,205 21,326 5,705 38,236
Intersegment revenues 0 2,504 40 2,544
Segment income (loss) (1,456) (5,557) (2,819) (9,832)
</TABLE>
The following reconciles segment income to consolidated income before
income taxes (in thousands):
<TABLE>
<CAPTION>
6 months ended 6 months ended
Sept. 30, 1998 Sept. 30, 1999
-------------- --------------
<S> <C> <C>
Revenue
Total revenues for reportable segments 40,667 40,780
Non-reportable segment revenues 3,750 4,011
Other revenues 0 0
Elimination of intersegment sales (2,515) (2,544)
---------- ----------
Total consolidated revenues 41,902 42,247
Total loss for reportable segments (4,621) (9,832)
Other profit or loss (1,505) (1,376)
Unallocated amounts:
Corporate and other expenses (2,467) (3,086)
Special charge 0 0
Interest expense (835) (1,367)
---------- ----------
Loss before income taxes (9,428) (15,661)
</TABLE>
9
<PAGE>
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 Odetics. Inc. When used in this Report,
the words "expect(s)," "feel(s)," "believe(s)," "intends," "plans," "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, market acceptance of new products, the Odetics incubator
strategy, and estimated Y2K costs, 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." Odetics' 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. Odetics 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. Odetics defines its business segments as Video Products, Telecom
-------
Products, and ITS. The Video Products segment includes our Broadcast division
and our Gyyr, Incorporated subsidiary. The Telecom Products segment includes
our Communications division which manufactures timing and synchronization
products, and the business of Mariner Networks, a wholly owned subsidiary. The
ITS segment represents Odetics' 93% owned subsidiary Odetics ITS, Incorporated.
Net Sales and Contract Revenues. Net sales and contract revenues consist
-------------------------------
of (i) sales of products and services to commercial and municipal customers
("net sales") and (ii) revenues derived from contracts with state, county and
municipal agencies for intelligent transportation systems projects ("contract
revenues"). Contract revenues also include revenue from contracts with agencies
of the United States Government and foreign entities for space recorders used
for geographical information systems. Total net sales and contract revenues
decreased 8.8% to $20.2 million for the three month period ended September 30
1999, compared to $22.1 million in the corresponding period of the prior fiscal
year. Total net sales and contract revenues increased 0.8% to $42.2 million for
the sixth month period ended September 30,1999 compared to $41.9 million in the
corresponding period of the prior fiscal year. Contract revenues increased
70.4% to $4.8 million for the three month period ended September 30 1999
compared to $2.8 million in the corresponding period of the prior fiscal year.
Contract revenues for the sixth month period ended September 30, 1999 increased
71.6% to $9.5 million compared to $5.6 million in the corresponding period of
the prior fiscal year. During the fiscal year ended March 31, 1999, we completed
the acquisition of Meyer Mohaddes Associates Inc. and the assets of Viggen
Corporation. The increase in contract revenues in the three and six month
periods ended September 30, 1999 reflects primarily the revenue contribution
from these acquisitions. The ITS base business of contract revenues (before
acquisitions) increased 43.4% and 29.9% in the three and six month periods
respectively compared to the same periods in the prior fiscal year but was
offset by a nearly corresponding decrease in revenue from contracts for space
recorders. The Company has experienced declining contract revenues from space
recorders due to soft market conditions for these products and because the
Company has shifted away from this business in its' strategic focus.
Net sales decreased 20.5% to $15.3 million for the three month period ended
September 30, 1999, compared to $19.3 million in the corresponding period of the
prior fiscal year. Net sales decreased 10.0% to $32.7 million for the six month
period ended September 30, 1999 compared to $36.3 million in the corresponding
period of the prior fiscal year. The decrease in net sales in the three month
and six month periods ended September 30, 1999 compared to the corresponding
periods of the prior year reflects increased sales of ITS products, offset by a
decrease in sales of Video Products and, to a lesser extent, decreased sales of
Telecom Products. Net sales of ITS in the three month and six month periods
ended September 30, 1999 reflects increased unit sales of its Vantage product, a
video based traffic intersection control product. The decrease in Video Products
net sales reflects primarily reduced unit sales of certain
10
<PAGE>
models of time lapse video tape decks sold by Gyyr.
Gross Profit. Gross profit as a percent of net sales decreased to 23.0% for
------------
the three month period ended September 30, 1999, compared to 30.8% the
corresponding period in the prior fiscal year. For the sixth month period ended
September 30, 1999 gross profit as a percent of net sales decreased to 26.6%
compared to 28.8% for the corresponding period of the prior fiscal year. The
decrease in gross profit performance in the three month and six month periods
ended September 30, 1999 reflects decreased gross profits experienced by Video
Products and Telecom Products due to lower absorption of fixed manufacturing
costs from reduced net sales volume as well as lower selling prices on certain
models of timelapse video tape decks sold by Gyyr. This was partially offset by
improved gross profits on Vantage product sales by the ITS business as a result
of increased unit sales volume.
Gross profit as a percent of contract revenues decreased to 21.2% for the
three months ended September 30, 1999 compared to 39.7% in the comparable period
of the prior fiscal year. For the six month period ended September 30, 1999
gross profit as a percentage of contract revenues decreased to 26.9% from 36.6%
in the comparable period of the prior fiscal year. The decline in gross profits
on contract revenues for the three and six month periods ended September 30,
1999 primarily reflects growth of ITS contract revenue relative to total
contract revenue. ITS contracts traditionally experience a lower overall gross
profit percentage than our contract revenues from space recorders.
Selling, General and Administrative Expense. Selling, general and
-------------------------------------------
administrative expense increased 10.0% to $8.5 million (or 42.1% of total net
sales and contract revenues) in the three months ended September 30, 1999
compared to $7.7 million (or 34.9% of total net sales and contract revenues) in
the corresponding period of the prior fiscal year. Selling, general and
administrative expenses increased 10.4% to $17.3 million (or 41.1% of total net
sales and contract revenues) for the six months ended September 30, 1999
compared to $15.7 million (or 37.5% of total net sales and contract revenues) in
the corresponding period of the prior fiscal year. Sales and marketing and
general and administrative expenses in each of Odetics entities reflects the
unique growth attributes and maturity of each operation. Broadcast and ITS each
experienced increased sales and marketing expenses in the three and six month
periods ended September 30, 1999, off set by reduction in spending for general
and administrative expenses in Broadcast and Gyyr for the same periods. Gyyr
also experienced reductions in spending for general and administrative expenses
in the three and six months ended September 30, 1999. The increase in selling,
general and administrative expense in the three and six month periods ended
September 30, 1999 compared to the previous fiscal year periods reflects
severance charges due to reductions in staffing, and increased charges for
amortization of goodwill related to acquisitions. The increase in sales and
marketing expenses in ITS primarily reflects increased costs to support the
roll-out of the Vantage and AutoVue product lines, and acquired costs related to
the acquisitions of Meyer Mohaddes Associates and the assets of Viggen
Corporation noted above. The principal expense categories that increased
include sales and marketing labor costs, advertising and promotion to support
new products and markets, and costs related to international expansion.
Research and Development Expense. Research and development expense
--------------------------------
increased 56.7% to $4.3 million (or 21.5% of total net sales and contract
revenues) in the three month period ended September 30, 1999 compared to $2.8
million (or 12.5% of total net sales and contract revenues) in the corresponding
period of the prior fiscal year. For the six month period ended September 30,
1999 research and development expenses increased 52.9% to $8.2 million (or
19.4% of total net sales and contract revenues) compared to $5.4 million (or
12.8% of total net sales and contract revenues) in the corresponding period of
the prior fiscal year. The increase in research and development expense for the
three and six month periods ended September 30, 1999 compared to the previous
fiscal year period principally reflects increased product development expenses
in Broadcast, Mariner Networks, and ITS. Broadcast has development activities to
support "Roswell", its software based control automation system for broadcast
station operations. Mariner Networks is developing a number of ATM wide area
access concentrators including its new product "Dexter". ITS continues to spend
development resources in support of "AutoVue", its automotive lane guidance and
warning system. For competitive reasons, Odetics closely guards the
confidentiality of its specific development projects. The increase in product
development expense relates primarily to development labor and related benefits,
prototype material cost and consulting fees. The acquisitions of Meyer Mohaddes
Associates and the assets of Viggen Corporation, noted above, did not contribute
to the increases in current year research and development expenses.
11
<PAGE>
Interest Expense, Net. Interest Expense, Net reflects interest income and
---------------------
interest expense as follows:
Three Months Six Months
Ended September 30
------------- --------------
1998 1999 1998 1999
----- ----- ------ -----
(in thousands)
Interest Expense 476 750 1,029 1,367
Interest Income 0 0 195 0
---- ---- ------ -----
Interest Expense, Net 476 750 834 1,367
==== ==== ====== =====
Interest expense primarily reflects interest on Odetics' line of credit
borrowings and mortgage interest. Interest income in the six months ended
September 30,1998 was derived from a note receivable due to Odetics from ATL
Products Inc., its previously owned subsidiary. The note was repaid in full in
July 1998. The increase in interest expense for the three and six month period
ended September 30, 1999 compared to the prior fiscal year reflects an increase
in the Odetics' average outstanding borrowings on its line of credit facility.
Income Taxes.
------------
On October 11, 1999, Odetics settled its litigation with Storage Technology
Corporation through an agreement for Storage Technology Corporation to pay
license fees to Odetics of $100 million. Odetics will realize a gain of
approximately $38 million in the quarter ended December 31, 1999 as a result of
the settlement, and expects to realize additional gains of $10 million in each
of the quarters ended September 30, 2000 and 2001. As a result of the gain to
be recognized in the current fiscal year, Odetics now expects to be able to
realize a portion of its tax operating loss carryforwards. Accordingly, as of
September 30, 1999, the valuation allowance related to Odetics deferred tax
assets has been reduced and a related tax benefit of $6.6 million has been
recognized in the quarter. There were no tax benefits recognized in the
corresponding periods of the prior fiscal year because of uncertainties then
present as to Odetics' ability to realize the deferred tax asset arising from
the losses of these periods.
Liquidity and Capital Resources
For the six months ended September 30, 1999, Odetics incurred losses before
tax benefits, depreciation and amortization of $12.8 million. Funding these
losses, net of increases in accounts payable of $5.0 million, resulted in the
use of $7.5 million of cash in operations during this period. Odetics used $1.0
million of cash for purchases of property, plant, and equipment in the six
months ended September 30, 1999.
During the six months ended September 30, 1999, Odetics has financed its
working capital requirements principally with advances on its line of credit
facility, and with the proceeds from the sale of an option on its principal
operating facility. Odetics has a line of credit relationship with Transamerica
Business Credit for a $17.0 million line of credit providing for borrowings at
prime plus 2.0%(10.25% at September 30, 1999). At September 30, 1999, Odetics
had outstanding borrowings of $16.7 million on its line of credit. Odetics
borrowings under this line of credit are secured by substantially all of its
assets.
On October 11, 1999, Odetics settled litigation with Storage Technology
Corporation in exchange for license fees of $100 million, $80 million of which
was paid the day of the settlement. The initial payment of $80 million resulted
in cash proceeds to Odetics, net of expenses and fees, of approximately $38.4
million. Odetics used a portion of the proceeds to retire its outstanding
borrowings on its line of
12
<PAGE>
credit with Transamerica Business Credit, and has retained the balance of the
funds to support general working capital requirements. Under the terms of the
settlement agreement, Odetics will receive two additional payments of $10
million each in September of 2000 and 2001.
In July 1999, Odetics sold an option to Manchester Capital LLC for an
aggregate purchase price of $5 million to purchase certain real property of
Odetics consisting of approximately 14 acres. The option exercise price is
equal to the lessor of (a) the appraised fair market value of this real property
as determined at November 1, 1999, or (b) at the option of Manchester Capital,
the appraised fair market value of this real estate at November 1, 2000 or
November 1, 2002. Odetics used the proceeds of the option sale for general
working capital purposes.
The Odetics strategy of incubating companies for eventual spin-off or sale
requires significant investments of cash. Odetics has historically relied upon
its line of credit facilities and on the sale of additional equity and debt
instruments as potential sources of capital to enable it to finance its
strategy. Odetics anticipates that its cash reserves, and future cash payments
afforded by the settlement of its litigation with Storage Technology
Corporation, in addition to its line of credit facility will enable it to
execute its current operating plans and meet its obligations on a timely basis
for at least the next twelve months.
Year 2000 Compliance
We are currently addressing problems associated with our computer systems
as the year 2000 approaches. Many existing computer systems and applications,
and other control devices use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century.
Others do not correctly process "leap year" dates. As a result, such systems
and applications could fail or create erroneous results unless corrected so that
they can correctly process data related to the year 2000 and beyond. These
problems are expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the year 2000 problem.
We have evaluated each of our products and believe that each is
substantially year 2000 compliant. We have adopted the British Standards
Institute standard for its statements of compliance regarding the year 2000. We
believe that it is not possible to determine whether all of our customers'
products into which our products are incorporated will be year 2000 compliant
because we have little or no control over the design, production and testing of
our customers' products.
The year 2000 problem could affect the systems, transaction processing
computer applications and devices that we use to operate and monitor all major
aspects of our business, including financial systems (such as general ledger,
accounts payable, and payroll), customer services, infrastructure, master
production scheduling, materials requirement planning, networks and
telecommunications systems. We believe that we have identified substantially
all of the major systems, software applications and related equipment used in
connection with our internal operations that must be modified or upgraded in
order to minimize the possibility of a material disruption to our business. We
are currently in the process of modifying and upgrading all affected systems and
expect to complete this process during the calendar year 1999. Because most of
our software applications are recent versions of vendor supported, commercially
available products, we have not incurred, and do not expect in the future to
incur, significant costs to upgrade these applications as year 2000 compliant
versions are released by the respective vendors. Systems such as telephone,
networking, test equipment, and security systems at our facilities may also be
affected by the year 2000 problem. We are currently assessing the potential
effect of and costs of remediating the year 2000 problem on our facility
systems. We estimate that our total cost of completing any required
modifications, upgrades or replacements of these systems will not have a
material adverse effect on our business, financial condition or result of
operations.
We presently estimate that the total cost of addressing our year 2000
issues will be approximately $500,000. We based this estimate using numerous
assumptions, including the assumption that we have already identified our most
significant year 2000 issues and that the plans of our third party suppliers
will be
13
<PAGE>
fulfilled in a timely manner without cost to us. We cannot be sure that these
assumptions are accurate, and actual results could differ materially from those
we anticipate.
We are currently developing contingency plans to address the year 2000
issues that may pose a significant risk to our on-going operations. These plans
could include accelerated replacement of affected equipment of software,
temporary use of back-up equipment of software or the implementation of manual
procedures to compensate for system deficiencies. We cannot be certain that
any contingency plans implemented by us would be adequate to meet our needs
without materially impacting our operations, that any such plan would be
successful or that our results of operations would not be materially and
adversely affected by the delays and inefficiencies inherent in conducting
operations in an alternative manner.
14
<PAGE>
RISK FACTORS
Our business is subject to a number of risks, some of which are discussed
below. Other risks are presented elsewhere in this report. You should consider
the following risks carefully in addition to the other information contained in
this report before purchasing the shares of our common stock. If any of the
following risks actually occur, they could seriously harm our business,
financial condition or results of operations. In such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
Our quarterly operating results fluctuate as a result of many factors. Our
---------------------------------------------------------------------
quarterly operating results have fluctuated and are likely to continue to
fluctuate due to a number of factors, many of which are not within our control.
Because of the factors listed below and other risks discussed in this report,
our future operating results could be below the expectations of securities
analysts and/or investors. If that happens, the trading price of our common
stock could be adversely affected.
Factors that could affect our revenues include the following:
. our significant investment in research and development for our
subsidiaries and divisions;
. our ability to develop, introduce, market and gain market acceptance
of new products applications and product enhancements in a timely
manner;
. the introduction of new products by competitors and technological
change in our target markets;
. the availability of components used in the manufacture of our
products;
. our ability to control costs;
. changes in our pricing policies and the pricing policies by our
suppliers and competitors, as well as increased price competition in
general;
. the long lead times associated with government contracts or required
by vehicle manufacturers;
. our success in expanding and implementing our sales and marketing
programs;
. our relatively small level of backlog at any given time; and
. the mix of sales among our business units;
In addition, our sales in any quarter may consist of a relatively small
number of large customer orders. As a result, the timing of a small number of
orders can impact our quarter to quarter results. The loss of or a substantial
reduction in orders from any significant customer could seriously harm our
business, financial condition and results of operations.
We have experienced substantial losses and expect future losses. We
---------------------------------------------------------------
incurred net losses of $2.4 million for the three months ended September 30,
1999 and net losses of $20.1 million for the year ended March 31, 1999. We may
not be able to achieve profitability on a quarterly or annual basis in the
future. Recent revenue growth also may not be sustainable and may not be
indicative of future operating results. Most of our expenses are fixed in
advance, and we generally are unable to reduce our expenses significantly in the
short term to compensate for any unexpected delay or decrease in anticipated
revenues. In addition, in order to implement our incubator strategy
successfully, we expect to continue to make significant investments in each of
our business units. As a result, we may continue to experience losses which
could cause the market price of our common stock to decline.
Our incubator strategy is expensive and may not be successful. We have
-------------------------------------------------------------
initiated a business strategy called our incubator strategy which is expensive
and highly risky. The goal of this strategy is to nurture and develop companies
that can be spun-off to our stockholders. This strategy has in the past required
us to make significant investments in our business units, both for research and
development, and also to develop a separate infrastructure for each of our unit,
sufficient to allow the unit to function as an independent public company. We
expect to continue to invest heavily in the development of our business
15
<PAGE>
units with the goal of conducting additional public offerings. We may not
recognize the benefits of this investment for a significant period of time, if
at all. Our ability to complete an initial public offering of any of our
business units and spin-off our interest to our stockholders will depend upon
many factors, including:
. the overall performance and results of operations of the particular
business unit;
. the potential market for our business unit;
. our ability to assemble and retain a broad, qualified management team
for the business unit;
. our financial position and cash requirements;
. the business unit's customer base and product line;
. the current tax treatment of spin-off transactions and our ability to
obtain favorable determination letters from the Internal Revenue
Service;
. general economic and market conditions; and
. the current market for initial public offerings.
We may not be able to complete a successful initial public offering or
spin-off of any of our business units in the near future, or at all. Even if we
do complete additional public offerings, we may decide not to spin-off a
particular business unit, or to delay the spin-off until a later date.
We must keep pace with rapid technological change to remain competitive.
-----------------------------------------------------------------------
Our target markets are in general characterized by the following factors:
. 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 and changes in the regulatory environment.
We believe that we must continue to make substantial investments to support
ongoing research and development in order to remain competitive. In particular,
we will need to modify certain of our products to accommodate the anticipated
deployment of digital television and the corresponding phase-out of analog
transmissions. We will also have to continue to develop and introduce new
products that incorporate the latest technological advancements in hardware,
storage media, operating system software and applications software in response
to evolving customer requirements. Our recent shift towards providing more
software solutions may create additional challenges for us, particularly in our
Broadcast division. Our business and results of operations could be adversely
affected if we do not anticipate or respond adequately to technological
developments or changing customer requirements.
Our future success depends on the successful development and market
-------------------------------------------------------------------
acceptance of new products. We believe our revenue growth and future operating
- --------------------------
results will depend on our ability to complete development of new products and
enhancements, achieve broad market acceptance of these products and
enhancements, and reduce our product costs. We may not be able to introduce
any new products or any enhancements to our existing products on a timely basis,
or at all. In addition, the introduction of any new products could adversely
affect the sales of our certain of our existing products.
Our future success will also depend in part on the success of several
recently introduced products including:
. Roswell, our automated facility management system for broadcast
television stations;
. Bowser, our visual asset manager;
. Vortex, our high performance dome product;
16
<PAGE>
. Digi Scan Pro, our advanced digital multiplexer;
. Vantage One, our single camera traffic detection system;
. Auto Vue, our lane departure warning system; and
. Dexter, our networking access device.
Market acceptance of our new products depends upon many factors, including
our ability to resolve technical challenges in a timely and cost- effective
manner, the perceived advantages of our new products over traditional products
and the marketing capabilities of our independent distributors and strategic
partners. Our business and results of operations could be seriously harmed by
any significant delays in our new product development. We have experienced
delays in the past in the introduction of new products, particularly with our
Roswell system. Certain of our new products could contain undetected design
faults and software errors or "bugs" when first released by us, despite our
testing. We may not discover these faults or errors until after a product has
been installed and used by our customers. Any faults or errors in our existing
products or in our new products may cause delays in product introduction and
shipments, require design modifications or harm customer relationships, any of
which could adversely affect our business and competitive position.
We currently anticipate that we will outsource the manufacture of Auto Vue
product line to a single manufacturer. This manufacturer may not be able to
produce sufficient quantities of this product in a timely manner or at a
reasonable cost, which could materially and adversely affect our ability to
launch or gain market acceptance of Auto Vue.
We may need additional capital in the future and may not be able to secure
--------------------------------------------------------------------------
adequate funds on terms acceptable to us. We recently raised approximately
- ----------------------------------------
$10.0 million in two private placements, approximately $8.0 million of which was
raised in December 1998 and received net proceeds of approximately $38 million
in October 1999 in settlement of patent infringement litigation. Approximately
$2.0 million was raised from the sale of Class A common stock to certain of our
officers and directors in March 1999, following stockholder approval of this
offering. We may need to raise additional capital in the future, either through
additional bank borrowings or other debt or equity financings. Our capital
requirements will depend on many factors, including:
. market acceptance of our products;
. increased research and development funding, and required investments
in our business units;
. increased sales and marketing expenses;
. potential acquisitions of businesses and product lines; and
. additional working capital needs.
If our capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced and such securities may have
rights, preferences and privileges senior to our common stock. Additional
financing may not be available on favorable terms or at all. If adequate funds
are not available or are not available on acceptable terms, we may be unable to
develop or enhance our products, expand our sales and marketing programs, take
advantage of future opportunities or respond to competitive pressures.
We have significant international sales and are subject to risks associated
---------------------------------------------------------------------------
with operating in international markets. International product sales
- ---------------------------------------
represented approximately 27% of our total net sales and contract revenues for
fiscal year ended March 31, 1999 and approximately 34% for the fiscal year ended
March 31, 1998. We believe that international sales will continue to represent a
significant portion of our revenues, and that continued growth and profitability
may require further expansion of our international operations. Accordingly, we
may be subject to many inherent risks related to international business
operations, which could adversely affect our business, financial condition and
results of operations. These risks include:
17
<PAGE>
risks include:
. unexpected changes in regulatory requirements, tariffs and other trade
barriers;
. longer accounts receivable payment cycles;
. seasonal fluctuations resulting from lower sales that typically occur
during the summer months in Europe and other parts of the world;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences;
. the burdens of compliance with a wide variety of foreign laws;
. reduced protection for intellectual property rights in some countries;
and
. political and economic instability.
Many of our international sales are denominated in U.S. dollars. As a
result, an increase in the relative value of the dollar could make our products
more expensive and potentially less price competitive in international markets.
We do not engage in any transactions as a hedge against risks of loss due to
foreign currency fluctuations or restrictions.
Any of these factors may adversely effect our future international sales
and, consequently, on our business, financial condition and operating results.
Our operating results have been adversely affected by the Asian economic
------------------------------------------------------------------------
crisis. Our telecommunications products are sold principally to LGIC of Korea.
- ------
As a result of economic instability in Asia, particularly in Korea, our sales in
this region declined over 70% in the past fiscal year and may continue to
decline in the future. It is possible that these sales could be further
impacted by the currency devaluations and related economic problems in this
region.
We need to manage growth and the integration of our acquisitions. Over the
----------------------------------------------------------------
past two years, we have significantly expanded our operations and made several
substantial acquisitions of diverse businesses, including Intelligent Controls,
Inc., International Media Integration Services, Ltd., Meyer Mohaddes Associates,
Inc., Viggen Corporation and certain assets of the Transportation Systems
business of Rockwell International. A key element of our business strategy
involves expansion through the acquisition of complementary businesses, products
and technologies. Our failure to manage growth and integrate our acquisitions
successfully could be costly and could adversely affect our business, financial
condition and results of operations.
Acquisitions may require significant capital infusions and, in general,
acquisitions also involve a number of special risks, including:
. potential disruption of our ongoing business and the diversion of our
. resources and management's attention;
. the failure to retain or integrate key acquired personnel;
. the challenge of assimilating diverse business cultures;
. increased costs to improve managerial, operational, financial and
. administrative systems and to eliminate duplicative services;
. the incurrence of unforeseen obligations or liabilities;
. potential impairment of relationships with employees or customers as a
. result of changes in management; and
. increased interest expense and amortization of acquired intangible
assets.
18
<PAGE>
To accommodate our recent growth and successfully integrate our
acquisitions, we anticipate that we will be required to implement a variety of
new and upgraded operational and financial systems, procedures and controls,
including the improvement of our accounting and other internal management
systems. We may not be able to successfully integrate such systems, procedures
and controls.
We depend on government contracts and subcontracts and face additional
----------------------------------------------------------------------
risks related to fixed price contracts. Over one half of the sales by our
- --------------------------------------
subsidiary, Odetics ITS, Inc., and a portion of our sales by our Communications
division were derived from contracts with governmental agencies, either as a
general contractor, subcontractor or supplier. Government contracts represented
approximately 16% of our net sales and contract revenues for the year ended
March 31, 1999 and approximately 22% for the six months ended September 30,
1999. We expect revenue from government contracts will continue to increase in
the near future. Government business is, in general, subject to special risks
and challenges, including:
. long purchase cycles;
. competitive bidding and qualification requirements;
. performance bond requirements;
. delays in funding, budgetary constraints and cut-backs; and
. milestone requirements, and liquidated damage provisions for failure to
meet contract milestones.
In addition, a large number of our government contracts are fixed price
contracts. As a result, we may not be able to recover for any cost overruns.
These fixed price contracts require us to estimate the total project cost based
on preliminary projections of the project's requirements. The financial
viability of any given project depends in large part on our ability to estimate
these costs accurately and complete the project on a timely basis. In the event
our costs on these projects exceed the fixed contractual amount, we will be
required to bear the excess costs. These additional costs adversely affect our
financial condition and results of operations. Moreover, certain of our
government contracts are subject to termination or renegotiation at the
convenience of the government, which could result in a large decline in our net
sales in any given quarter. Our inability to address any of the foregoing
concerns or the loss or renegotiation of any material government contract could
seriously harm our business, financial condition and results of operations.
The markets in which we operate are highly competitive and have many more
-------------------------------------------------------------------------
established competitors. We compete with numerous other companies in our target
- -----------------------
markets and we expect such competition to increase due to technological
advancements, industry consolidations and reduced barriers to entry. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could seriously harm our business, financial
condition and results of operations. Many of our competitors have far greater
name recognition and greater financial, technological, marketing and customer
service resources than we do. This may allow them to respond more quickly to
new or emerging technologies and changes in customer requirements. It may also
allow them to devote greater resources to the development, promotion, sale and
support of their products than we can. Recent consolidations of end users,
distributors and manufacturers in our target markets have exacerbated this
problem. As a result of the foregoing factors, we may not be able to compete
effectively in our target markets and competitive pressures could adversely
affect our business, financial condition and results of operations.
We cannot be certain of our ability to attract and retain key personnel and
---------------------------------------------------------------------------
we do not have employment agreements with any key personnel. Our inability to
- -----------------------------------------------------------
attract and retain additional key employees or the loss of one or more of our
current key employees could adversely affect upon our business, financial
condition and results of operations. Due to the specialized nature of our
business, we are highly dependent on the continued service of our executive
officers and other key management, engineering and technical personnel,
particularly Joel Slutzky, our Chief Executive Officer and Chairman of the
Board, and Gregory A. Miner, our Chief Operating Officer and Chief Financial
Officer. We do not have any employment contracts with any of our officers or key
employees. The loss of any of these persons would seriously harm our development
and marketing efforts, and would adversely affect our business. Our
19
<PAGE>
success will also depend in large part upon our ability to continue to attract,
retain and motivate qualified engineering and other highly skilled technical
personnel. Competition for employees, particularly development engineers, is
intense. We may not be able to continue to attract and retain sufficient numbers
of such highly skilled employees.
We may not be able to adequately protect or enforce our intellectual
--------------------------------------------------------------------
property rights. If we are not able to adequately protect or enforce the
- ---------------
proprietary aspects of our technology, competitors could be able to access our
proprietary technology and our business, financial condition and results of
operations will likely be seriously harmed. We currently attempt to protect our
technology through a combination of patent, copyright, trademark and trade
secret laws, employee and third party nondisclosure agreements and similar
means. Despite our efforts, other parties may attempt to disclose, obtain or
use our technologies or solutions. Our competitors may also be able to
independently develop products that are substantially equivalent or superior to
our products or design around our patents. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
United States. As a result, we may not be able to protect our proprietary rights
adequately in the United States or abroad.
We have engaged in litigation in the past and litigation may be necessary
in the future to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Litigation may also be
necessary to defend against claims of infringement or invalidity by others. An
adverse outcome in litigation or any similar proceedings could subject us to
significant liabilities to third parties, require us to license disputed rights
from others or require us to cease marketing or using certain products or
technologies. We may not be able to obtain any licenses on terms acceptable to
us, or at all. Any of these results could adversely affect on our business,
financial condition and results of operations. 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 seriously harm our business,
financial condition and results of operations.
The trading price of our common stock is volatile. The trading price of our
-------------------------------------------------
common stock has been subject to wide fluctuations in the past, decreasing from
$20.375 in October 1997 to $4.25 in October 1998. We may not be able to
increase or sustain the current market price of our common stock in the future.
The market price of our common stock could continue to fluctuate in the future
in response to various factors, including, but not limited to:
. quarterly variations in operating results;
. shortages announced by suppliers;
. announcements of technological innovations or new products;
. acquisitions or businesses, products or technologies;
. changes in pending litigation;
. our ability to spin-off any business units;
. applications or product enhancements by us or by our competitors; and
. changes in financial estimates by securities analysts.
The stock market in general has experienced volatility which has
particularly affected the market prices of equity securities of many high
technology companies. This volatility has often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock.
We are controlled by certain of our officers and directors. As of
----------------------------------------------------------
September 30, 1999, our officers and directors beneficially owned approximately
29% of the total combined voting power of the outstanding shares of our Class A
common stock and Class B common stock. As a result of their stock ownership,
our management will be able to significantly influence the election of our
directors and the outcome of corporate actions requiring stockholder approval,
such as mergers and acquisitions, regardless of how our other stockholders may
vote. This concentration of voting control may have a significant effect in
delaying,
20
<PAGE>
deferring or preventing a change in our management or change in control and may
adversely affect the voting or other rights of other holders of common stock.
Our stock structure and certain anti-takeover provisions may effect the
-----------------------------------------------------------------------
price of our common stock. Certain provisions of our certificate of
- -------------------------
incorporation and our stockholder rights plan could make it difficult for a
third party to acquire us, even though an acquisition might be beneficial to our
stockholders. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. Our Class A common
stock entitles the holder to one-tenth of one vote per share and our Class B
common stock entitles the holder to one vote per share. In addition, holders of
the Class B common stock are presently entitled to elect six of our nine
directors. The disparity in the voting rights between our common stock, as well
as our insiders' significant ownership of the Class B common stock, could
discourage a proxy contest or make it more difficult for a third party to effect
a change in our management and control. In addition, our board of directors is
authorized to issue, without stockholder approval, up to 2,000,000 shares of
preferred stock with voting, conversion and other rights and preferences
superior to those of our common stock, as well as additional shares of Class B
common stock. Our future issuance of preferred stock or Class B common stock
could be used to discourage an unsolicited acquisition proposal.
In March 1998, we adopted a stockholder rights plan and declared a dividend
of preferred stock purchase rights to our stockholders. In the event a third
party acquires more than 15% of the outstanding voting control of Odetics or 15%
of our outstanding common stock, the holders of these rights will be able to
purchase the junior participating preferred stock at a substantial discount off
of the then current market price. The exercise of these rights and purchase of a
significant amount of stock at below market prices could cause substantial
dilution to a particular acquiror and discourage the acquiror from pursuing
Odetics. The mere existence of the stockholder rights plan often delays or makes
a merger, tender offer or proxy contest more difficult.
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 systems and software products will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software used by many companies may need to be upgraded
to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities. Although our
core products are designed to be Year 2000 compliant, it is difficult to ensure
that our products contain all necessary date code changes. We are in the
process of updating our existing information systems to become Year 2000
compliant, and are substantially complete in that process as of September
30,1999. We have established an internal task force to evaluate our current
status and state of readiness for the Year 2000. We believe the most significant
impact of the Year 2000 issues will be the readiness of our suppliers,
distributors, customers and lenders with whom we must interact. We have
contingency plans to address our ability to remedy these issues but there is a
risk that we may not have fully identified the Year 2000 impact. As such, we may
not be able to update our systems and products or resolve the other Year 2000
issues without disrupting our business or without incurring significant expense.
Our failure to address these issues on a timely basis or at all could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on our
business, financial condition and results of operations.
We do not pay cash dividends. We have never paid cash dividends on our
----------------------------
common stock and do not anticipate paying any cash dividends on either class of
our common stock in the foreseeable future.
We may be subject to additional risks. The risks and uncertainties
-------------------------------------
described above are not the only ones facing us. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also adversely affect our business operations.
21
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On October 11, 1999, Odetics settled its litigation with Storage Technology
Corporation through an agreement for Storage Technology Corporation to pay
license fees to Odetics of $100 million. Odetics will realize a gain of
approximately $38 million in the quarter ended December 31, 1999 as a result of
the settlement, and expects to realize additional gains of $10 million in each
of the quarters ended September 30, 2000 and 2001.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Annual Meeting of the Stockholders of Odetics, Inc.
held on September 30, 1999, the following proxies were tabulated representing
592,494 shares of Class A Common Stock or 74% of the eligible voting share, and
675,770 of Class B Common Stock or 64% of the total outstanding shares voted in
the following manner:
Proposal I: Election of the Board of Directors
- ------------------------------------------------
<TABLE>
<CAPTION>
Total Vote for Total Vote Withheld
Class A Common Stock Each Director From Each Director
-------------------- ------------- ------------------
<S> <C> <C>
Crandall Gudmundson 590,394 2,100
Jerry F. Muench 590,394 2,100
Tom Thomas 590,199 2,295
Total Vote for Total Vote Withheld
Class B Common Stock: Each Director From Each Director
-------------------- -------------- ------------------
Joel Slutzky 675,370 400
Kevin C. Daly 675,370 400
Ralph R. Mickelson 675,370 400
Gregory A. Miner 675,370 400
John W. Seazholtz 675,370 400
Paul E. Wright 675,370 400
</TABLE>
Proposal II: To approve an amendment to the 1997 Stock Incentive Plan for an
---------------------------------------------------------------
additional 400,000 Shares of Class A Common Stock.
-------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
(1/10 vote per share) (1 vote per share)
--------------------- ------------------
<S> <C> <C>
For 563,532 641,244
Against 26,283 32,426
Abstain 2,680 2,100
</TABLE>
Proposal III: To Ratify the Appointment of Ernst & Young LLP as the Company's
- -----------------------------------------------------------------------------
independent auditors for the fiscal year ending March 31, 2000.
--------------------------------------------------------------
22
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
(1/10 vote per share) (1 vote per share)
--------------------- ------------------
<S> <C> <C>
For 589,683 675,330
Against 1,191 0
Abstain 1,621 440
</TABLE>
Item 5. Other Information
NONE.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
In connection with the Company's lawsuit against Storage Technology
Corporation on July 8,1999, the Company filed a Form 8-K to report the
U.S. Court of Appeals for the Federal Circuit reversal of the trial court's
judgment of non-infringement and reinstatement of the verdict of $70.6
million.
23
<PAGE>
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)
Dated: November 15, 1999
--------------------
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,913
<SECURITIES> 0
<RECEIVABLES> 18,067
<ALLOWANCES> 0
<INVENTORY> 16,969
<CURRENT-ASSETS> 48,875
<PP&E> 53,001
<DEPRECIATION> (31,472)
<TOTAL-ASSETS> 88,070
<CURRENT-LIABILITIES> 30,006
<BONDS> 0
0
0
<COMMON> 908
<OTHER-SE> 26,566
<TOTAL-LIABILITY-AND-EQUITY> 88,070
<SALES> 42,247
<TOTAL-REVENUES> 42,247
<CGS> 30,981
<TOTAL-COSTS> 30,981
<OTHER-EXPENSES> 25,560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,367
<INCOME-PRETAX> (15,661)
<INCOME-TAX> (6,575)
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</TABLE>
