<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 June 30, 2000
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 AUGUST 7, 2000
Class A Common Stock - 8,209,217 shares.
Class B Common Stock - 1,051,541 shares.
1
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INDEX
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PART I FINANCIAL INFORMATION Page
-------------------------------- ----
ITEM 1. CONSOLIDATED STATEMENTS OF OPERATIONS FOR 3
THE THREE MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2000 4
AND JUNE 30, 2000 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6
THE THREE MONTHS ENDED JUNE 30, 1999 AND
2000 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 19
MARKET RISK
PART II OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
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
June 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Net sales and contract revenues:
Net sales $17,370 $14,842
Contract revenues 4,705 4,782
-------- --------
Total net sales and contract revenues 22,075 19,624
Costs and expenses:
Cost of sales 12,203 11,764
Cost of contract revenues 3,160 3,259
-------- --------
Gross profit 6,712 4,601
-------- --------
Selling, general and administrative expense 8,859 11,144
Research and development expense 3,879 4,610
-------- --------
Total operating expenses 12,738 15,754
-------- --------
Loss from operations (6,026) (11,153)
-------- --------
Non-operating items
Other income -- 19,055
Interest expense, net 617 472
-------- --------
Income (loss) before taxes (6,643) 7,430
-------- --------
Income tax expense -- --
-------- --------
Net income (loss) ($6,643) $ 7,430
======== ========
Earnings (loss) per share:
Basic ($0.74) $0.80
======== ========
Diluted ($0.74) $0.78
======== ========
Weighted average number of shares outstanding:
Basic 9,030 9,249
======== ========
Diluted 9,030 9,528
======== ========
</TABLE>
See notes to consolidated financial statements.
3
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ODETICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
March 31, June 30,
2000 2000
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash $ 4,880 $ 7,353
Trade accounts receivable, net 13,576 12,242
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,283 2,842
Inventories:
Finished goods 1,203 1,235
Work in process 859 754
Materials and supplies 16,150 17,181
-------- --------
Total inventories 18,212 19,170
Prepaid expenses 1,978 2,351
-------- --------
Total current assets 41,929 43,958
Property, plant and equipment:
Land 2,060 2,060
Buildings and improvements 18,868 18,915
Equipment, furniture and fixtures 33,328 34,008
-------- --------
54,256 54,983
Less accumulated depreciation (33,520) (34,185)
-------- --------
Net property, plant and equipment 20,736 20,798
Capitalized software costs, net 6,482 6,198
Goodwill, net 12,004 11,916
Other assets 699 615
-------- --------
Total assets $ 81,850 $ 83,485
======== ========
</TABLE>
See notes to consolidated financial statements.
4
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ODETICS, INC.
CONSOLIDATED BALANCE SHEETS (cont'd)
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
March 31, June 30,
2000 2000
--------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 10,702 $ 8,084
Accrued payroll and related 4,892 4,878
Accrued expenses 2,313 3,218
Contractual loss accrual 3,056 3,056
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,303 1,476
Revolving line of credit 3,706 -
Other current liabilities - 5,000
Current portion of long-term debt 3,102 3,265
---------- ---------
Total current liabilities 29,074 28,977
Long-term debt, less current portion 11,666 11,141
Other liabilities 5,000 -
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;
8,204,351 shares of Class A and 1,051,541 shares
of Class B issued and outstanding at
June 30, 2000 - $.10 par value 923 926
Paid-in capital 61,200 61,485
Treasury stock (22) (1)
Notes receivable from associates (61) (61)
Accumulated deficit (26,192) (18,762)
Accumulated other comprehensive income 262 (220)
-------- --------
Total stockholders' equity 36,110 43,367
-------- --------
Total liabilities and stockholders' equity $ 81,850 $ 83,485
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ODETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
1999 2000
------- --------
<S> <C> <C>
Operating activities
Net income (loss) $(6,643) $ 7,430
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,434 1,037
Provision for deferred income taxes 339 --
Other -- (482)
Changes in operating assets and liabilities:
Decrease in accounts receivable 640 1,334
(Increase) decrease in net costs and
estimated earnings in excess of billings (352) 614
(Increase) decrease in inventories 1,242 (958)
(Increase) decrease in prepaids and other assets 139 (290)
(Decrease) in accounts payable and
accrued expenses (613) (1,726)
------- -------
Net cash provided by (used) in operating activities (3,814) 6,959
Investing activities
Purchases of property, plant and, equipment (494) (727)
Software development costs (102) --
------- -------
Net cash used in investing activities (596) (727)
Financing activities
Proceeds from revolving line of credit and
long-term borrowings 11,102 6,782
Principal payments on line of credit, long-term
debt and capital lease obligations (5,984) (10,850)
Proceeds from issuance of common stock 239 309
------- --------
Net cash provided by (used in) financing activities 5,357 (3,759)
------- --------
Increase in cash 947 2,473
Cash at beginning of year 787 4,880
------- --------
Cash at June 30 $ 1,734 $ 7,353
======= ========
</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 June 30, 2000 and the
consolidated results of operations and cash flows for the three month
period ended June 30, 1999 and 2000. 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 months ended June 30, 2000 are not necessarily indicative of
those to be expected for the entire year. The accompanying
consolidated financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended March 31,
2000 filed with the Securities and Exchange Commission.
Note 2 - Income Taxes
------
Income tax expense (benefit), if any, for the three month period
ended June 30, 1999 and 2000 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 the three months ended June 30, 1999 due to
the uncertainty as to the ultimate realization of the benefit at that
time. Because of the Company's net operating loss carryforwards and
tax credit carryforwards, available at June 30, 2000, no provision
for income taxes was recorded for the three months ended June 30,
2000.
Note 3 - Long-Term Debt
<TABLE>
<CAPTION>
March 31, June 30,
2000 2000
---------- --------
<S> <C> <C>
(in thousands)
Mortgage note $ 7,027 $ 6,724
Notes payable 5,750 5,750
------- -------
Contracts payable 1,991 1,932
------- -------
14,768 14,406
Less current portion 3,102 3,265
------- -------
$11,666 $11,141
======= =======
</TABLE>
7
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Note 4 - Legal Proceedings
------
On October 11, 1999, Odetics settled a patent infringement case it had
brought against Storage Technology Corporation ("StorageTek"). Pursuant to
an agreement, StorageTek agreed to pay the Company a license fee totaling
$100.0 million for use of the Company's United States Patent No. 4,779,151.
Under the agreement, the license fee was payable in three installments:
$80.0 million upon signing of the agreement, and two annual installments of
$10.0 million payable in each of October 2000 and 2001. In connection with
the initial payment, the Company received $38.4 million, net of legal fees
and other direct expenses, which was reflected as royalty income in the
Company's statement of operations in its fiscal year ended March 31, 2000.
On June 12, 2000, the Company and StorageTek amended the agreement, whereby
StorageTek agreed to pay a final discounted payment of $17.8 million
immediately in full settlement of the $20.0 million otherwise due to
complete the settlement. Accordingly, the Company recognized non-operating
income in that amount in its quarter ended June 30, 2000.
Note 5 - Comprehensive Income
------
The components of comprehensive income (loss) for the three months
ended June 30, 1999 and 2000 are as follows in thousands:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
Net income (loss) $(6,643) $7,430
Foreign currency translation adjustment 110 (482)
-------- --------
Comprehensive income (loss) $(6,533) $6,948
======== ========
</TABLE>
Note 6 - Business Segment Information
------
The Company operates in three reportable segments: intelligent
transportation systems, video products, which include products for the
television broadcast and video security markets, and
telecommunications. Selected financial information for the Company's
reportable segments for the three months ended June 30, 1999 and 2000
follows (in thousands):
<TABLE>
<CAPTION>
Intelligent Video Telecom
Transportation Products Products Total
-----------------------------------------------------
<S> <C> <C> <C> <C>
Three months ended June 30, 1999
Revenue from external customers 5,097 11,444 3,644 20,185
Intersegment revenues - 1,167 16 1,183
Segment income (loss) (688) (2,177) (1,015) (3,880)
Three months ended June 30, 2000
Revenue from external customers 5,777 10,214 1,360 17,351
Intersegment revenues - 1,227 28 1,255
Segment income (loss) (2,381) (3,214) (1,688) (7,283)
</TABLE>
8
<PAGE>
The following reconciles segment income (loss) to consolidated income (loss)
before income taxes in thousands:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------
1999 2000
---------- ----------
<S> <C> <C>
Revenue
Total revenues for reportable segments $21,368 $18,606
Non-reportable segment revenues 1,890 2,273
Elimination of intersegment sales (1,183) (1,255)
---------- ----------
Total consolidated revenues 22,075 19,624
Total loss for reportable segments (3,880) (7,283)
Other profit or loss (842) (1,125)
Unallocated amounts:
Corporate and other expenses (1,304) 16,310
Interest expense (617) (472)
---------- ----------
Income (loss) before income taxes $(6,643) $ 7,430
========== ==========
</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. 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 and results of operations, funding and
cash requirements, supply issues, market acceptance of new products, the Odetics
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." 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
Odetics defines its business segments as Video Products, Telecom Products
and Intelligent Transportation Systems ("ITS"). The Video Products segment
includes our Broadcast, Inc. and Gyyr, Incorporated subsidiaries. The Telecom
Products segment includes Zyfer, Inc., which manufactures timing and
synchronization products, and the business of Mariner Networks, Inc, a wholly-
owned subsidiary. The ITS segment consists of Odetics' 93% owned subsidiary,
Iteris, Inc.
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 11.1% to $19.6 million for the three months ended June 30, 2000,
compared to $22.1 million in the corresponding period of the prior fiscal year.
Contract revenues increased 1.6% to $4.8 million for the three months ended June
30, 2000 compared to $4.7 million in the corresponding period of the prior
fiscal year. The increase in contract revenues in the three months ended June
30, 2000 reflects a 20.0% increase in Iteris' contract revenues for intelligent
transportation systems projects, offset by a nearly corresponding decline in
revenues from contracts related to geographical information systems. We have
focused our recent contract procurement efforts on commercial markets and the
markets for Iteris' products and services.
Net sales decreased 14.6% to $14.8 million for the three months ended June
30, 2000, compared to $17.4 million in the corresponding period of the prior
fiscal year. This increase reflects decreased sales in Broadcast, Mariner
Networks and Zyfer, offset in part by a 4.7% increase in sales of Gyyr products.
The decrease in Broadcast sales reflects delays in the delivery of our Roswell
facility management system. We expect the Roswell system to begin shipping in
the three months ended September 30, 2000. The decline in Mariner Networks'
sales reflects the loss in August 1999 of IBM as a significant OEM customer of
its FRAIM product family. We expect that Mariner Networks will begin delivery of
its Dexter 3000 product in the three months ended September 30, 2000. Iteris'
revenues derived from product sales were relatively flat in the three months
ended June 30, 2000 compared to the corresponding period of 1999, reflecting
unchanged sales of Vantage intersection control products year over year.
Gross Profit. Gross profit as a percent of net sales decreased to 20.7%
for the three months ended June 30, 2000, compared to 29.7% the corresponding
period in the prior fiscal year. This decrease primarily reflects lower gross
profits earned as a percent of net sales in Mariner Networks, Zyfer and
Broadcast. Each of these three businesses experienced lower sales volume in the
three months ended June 30, 2000, and increased levels of unabsorbed
manufacturing overhead. Broadcast experienced increased gross profit as a
percent of net sales in the three months ended June 30, 2000 as a result of a
product mix that included less software content than the previous year's
comparable quarter. As Broadcast begins delivering Roswell, its facility
management system, it
10
<PAGE>
expects gross profits as a percent of net sales to increase. Gross profit as a
percent of contract revenues decreased to 31.9% for the three months ended June
30, 2000 compared to 32.8% in the comparable period of the prior fiscal year.
The decline in gross profits on contract revenues for the three months ended
June 30, 2000 primarily reflects an unfavorable mix of certain ITS contracts at
lower gross profits in the first quarter of the current fiscal year.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 25.8% to $11.1 million (or 56.8% of total net
sales and contract revenues) in the three months ended June 30, 2000 compared to
$8.9 million (or 40.1% of total net sales and contract revenues) in the
corresponding period of the prior fiscal year. This increase primarily reflects
increased sales and marketing expenses in Broadcast and Mariner Networks. We
increased our sales and marketing expenses 12.8% in Broadcast in the three
months ended June 30, 2000, compared to the prior year period, to build the
selling organization to support anticipated growth in sales of its Roswell
facility management system. We increased spending for sales and marketing
expenses by 51.0% in Mariner Networks in the three months ended June 30, 2000
compared to the comparable period in 1999 as a result of general infrastructure
required for our Dexter family of products which are scheduled for release to
market during the three months ending September 30, 2000. Our general and
administrative expenses, which are aggregated with sales and marketing expenses
in our statements of operations, increased approximately 46.9% in the three
months ended June 30, 2000 compared to 1999 primarily due to increased
administrative infrastructure in Iteris, in addition to the write-off of
$360,000 of offering costs related to Iteris' aborted initial public offering.
In anticipation of its planned public offering and separation from Odetics,
Iteris expanded its administrative infrastructure beginning in the three months
ended December 31, 1999. 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 18.9% to $4.6 million (or 23.5% of total net sales and contract
revenues) in the three months ended June 30, 2000 compared to $3.9 million (or
17.6% of total net sales and contract revenues) in the corresponding period of
the prior fiscal year. The increase in research and development expense in the
three months ended June 30, 1999 compared to the previous fiscal year period
principally reflects increased product development expenses in Zyfer and Iteris.
For competitive reasons, Odetics closely guards the confidentiality of its
specific development projects. The increase in Zyfer primarily reflects
increased development work to support its new Stealthkey(TM) product initiatives
in secured communications over the Internet. The increase in Iteris primarily
reflects increased development investment to support its initiatives in
personalized traveler information in addition to continued development of its
AutoVue product line. The principle expense categories that increased include
development labor and related benefits, prototype material cost and consulting
fees.
Interest Expense, Net. Interest expense, net reflects interest income and
interest expense as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
(in thousands)
Interest Expense $ 617 $ 539
Interest Income - 67
-------- --------
Interest Expense, Net $ 617 $ 472
======== ========
</TABLE>
Interest expense primarily reflects interest on Odetics' line of credit
borrowings and mortgage interest. Interest income in the three months ended
June 30, 2000 was derived from short-term investments of excess cash deposits.
The decrease in interest expense for the three months ended June 30, 2000
compared to the comparable period in the prior fiscal year reflects a decrease
in the Odetics' average outstanding borrowings on its line of credit facility.
11
<PAGE>
Income Taxes. No income tax benefit was provided on the net loss of
Odetics for the three months ended June 30, 1999 because management determined
that Odetics could not meet the criteria for recognition of the resulting
deferred tax asset. Because of the Company's net operating loss carryforwards
and the credit carryforwards available at June 30, 2000, no provision for income
taxes was recorded for the three months ended June 30, 2000.
Liquidity and Capital Resources
Odetics reported net income of $7.4 million in the three months ended June
30, 2000. Net income included cash received from non-operating gains of $19.1
million. Net income, adjusted for non-cash expenses for depreciation, and
working capital financing needs of $1.5 million during the three months ended
June 30, 2000 yielded net cash provided by operations of $7.0 million. We used
$727,000 of operating cash generated during the quarter ended June 30, 2000 to
finance capital equipment purchases and utilized the balance to service long-
term debt and reduce borrowings on our line of credit.
Odetics has a $17.0 million line of credit relationship with Transamerica
Business Credit providing for borrowings at prime plus 2.0% (11.5% at June 30,
2000). At June 30, 2000, Odetics had no outstanding borrowings on this line of
credit. Odetics' borrowing under this line of credit are secured by
substantially all of its assets.
During the three months ended June 30, 2000, we recognized non-operating
income of $19.1 million in connection with the settlement with StorageTek and
the sale of certain assets of our solid state recorder product line. In October
1999, we settled litigation with StorageTek in exchange for license fees payable
to us of $100.0 million, $80.0 million of which was paid on the settlement date.
In June 2000, we amended the settlement agreement with StorageTek to provide for
the acceleration of the payment of the $20.0 million still owed Odetics. Under
the terms of the amendment, StorageTek paid us $17.8 million in the three months
ended June 30, 2000 to complete the settlement. We recognized non-operating
income in the amount of $17.8 million in the three months ended June 30, 2000,
and used cash proceeds to pay down borrowings on our line of credit. During the
three months ended June 30, 2000, Odetics sold for cash of $1.5 million certain
assets of its solid state recording product line. In connection with this sale,
we recorded a non-operating gain of $1.2 million in the three months ended June
30, 2000.
In July 1999, Odetics sold an option to Manchester Capital LLC for an
aggregate purchase price of $5.0 million to purchase certain real property of
Odetics consisting of approximately 14 acres located at 1515 South Manchester
Avenue, Anaheim, California. Odetics used the proceeds of the option sale for
general working capital purposes. In August 2000, Odetics repurchased this
option from Manchester Capital LLC for $5.6 million.
The Odetics strategy of incubating companies for eventual spin-off or sale
requires significant investments of cash. Odetics has historically utilized
several alternatives for meeting its liquidity requirements, including the
monetization of certain real property, the re-negotiation of its credit
facilities, and the sale of additional equity and debt instruments. Odetics
anticipates that it will be successful in its efforts to continue to finance its
capital requirements and that it will be able it 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
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.
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 size and timing of significant customer orders;
. the introduction of new products by competitors;
. 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;
. technological changes in our target markets;
. our relatively small level of backlog at any given time;
. the mix of sales among our divisions;
. deferrals of customer orders in anticipation of new products,
applications or product enhancements;
. the Asian economic crisis and instability;
. currency fluctuations and our ability to get currency out of certain
foreign countries; and
. general economic and market conditions.
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 may 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.
Because of the factors listed above 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.
We Have Experienced Substantial Losses and Expect Future Losses. We have
experienced operating losses of $11.2 million for the three months ended June
30, 2000, $38.7 million for the year ended March 31, 2000 and $18.3 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. 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.
13
<PAGE>
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 divisions, sufficient to allow the division to function as an independent
public company. We expect to continue to invest heavily in the development of
our divisions 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
divisions and/or 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; and
. general economic and market conditions, including the receptivity of the
stock markets to initial public offerings.
We may not be able to complete a successful initial public offering or
spin-off of any of our divisions in the near future, or at all. During fiscal
2000, we attempted to complete the initial public offering of Iteris. We
aborted the offering due to adverse market conditions. 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
Broadcast. 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
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including:
. Roswell, our automated facility management system for broadcast
television stations;
. Bowser, our visual asset manager;
. MicroStation, our integrated disk recorder and automation system;
. Vortex, our high performance dome product;
. Digi Scan Pro, our advanced digital multiplexer;
. DVMS, our family of digital time-lapse recorders;
. Vantage One and Vantage Edge, our single camera traffic detection
systems;
. AutoVue, 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 our
AutoVue 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 AutoVue.
We May Need Additional Capital in the Future and May Not Be Able to
Secure Adequate Funds on Terms Acceptable to Us. We raised approximately $7.3
million in a private placement of Odetics Class A common stock in December 1998
and approximately $2.0 million in March 1999. We raised $5.0 million through
the sale of an option on our principal Anaheim facility in July 1999. In
addition, we raised $3.75 million through the issuance of debt to Daimler
Chrysler Ventures, which is convertible into 2.5% of the equity securities of
Iteris. We may need to raise additional capital in the near 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 divisions;
. 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 20% of our total net sales and contract revenues for
the three months ended June 30, 2000, 19% for the fiscal year ended March 31,
2000,
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approximately 27% for the fiscal year ended March 31, 1999 and approximately 34%
for the fiscal year ended March 31, 1998. International business operations are
subject to inherent risks, including, among others:
. 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;
. the burdens of compliance with a wide variety of foreign laws;
. reduced protection for intellectual property rights in some countries;
. currency fluctuations and restrictions; and
. political and economic instability.
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. Our international
sales are currently denominated primarily 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.
Any of these factors may adversely effect our future international sales
and, consequently, on our business and operating results. Furthermore, as we
increase our international sales, our 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.
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 60% in fiscal year 1999 as compared to fiscal 1998.
While sales to LGIC in fiscal 2000 increased, the aggregate sales to LGIC in
fiscal 2000 were still significantly below fiscal 1998 sales. It is possible
that these sales could be further impacted by the currency devaluations and
related economic problems in this region, and sales in this region could
continue to decline.
We Need to Manage Growth and the Integration of Our Acquisitions. Over
the past three 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, certain assets of the Transportation
Systems business of Rockwell International, and the Security Products Division
of Digital Systems Processing, Inc. A key element of our business strategy
involves expansion through the acquisition of complementary businesses, products
and technologies. 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.
Our competitors are also soliciting potential acquisition candidates, which
could both increase the price of any acquisition targets and decrease the number
of attractive companies available for acquisition.
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Acquisitions, combined with the expansion of our business divisions and
recent growth has placed and is expected to continue to place a significant
strain on our resources. To accommodate this growth, 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. All of these updates will require
substantial management effort. Our failure to manage growth and integrate our
acquisitions successfully could adversely affect our business, financial
condition and results of operations.
We Depend on Government Contracts and Subcontracts and Face Additional
Risks Related to Fixed Price Contracts. A significant portion of the sales by
Iteris, a portion of our sales by Zyfer were derived from contracts with
governmental agencies, either as a general contractor, subcontractor or
supplier. Government contracts represented approximately 24% of our total net
sales and contract revenues for the year ended March 31, 2000. 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;
. 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. 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 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.
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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. 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.
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. 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 variation 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 division;
. applications or product enhancements by us or by our competitors; and
. changes in financial estimates by securities analysts.
The stock market in general has recently 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 March
31, 2000, 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,
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
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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 our
company 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 our company. The mere existence of the stockholder rights plan often
delays or makes a merger, tender offer or proxy contest more difficult.
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 our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also adversely affect our business operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Substantially all of the Company's debt outstanding at June 30, 2000 is
fixed rate debt and accordingly, the Company does not have significant exposure
to changes in interest rates.
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PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On October 11, 1999, Odetics settled a patent infringement case it had
brought against Storage Technology Corporation ("StorageTek"). Pursuant
to an agreement, StorageTek agreed to pay Odetics a license fee
totaling $100.0 million for use of Odetics' United States Patent No.
4,779,151. Under the agreement, the license fee was payable in three
installments: $80.0 million upon signing of the agreement, and two
annual installments of $10.4 million payable in each of October 2000
and 2001. In connection with the initial payment, Odetics received
$38.4 million, net of legal fees and other direct expenses, which was
reflected as royalty income in Odetics' statement of operations in its
fiscal year ended March 31, 2000.
On June 12, 2000, Odetics and StorageTek amended the agreement, whereby
StorageTek agreed to pay a final discounted payment of $17.8 million
immediately in full settlement of the $20.0 million otherwise due to
complete the settlement. Accordingly, Odetics recognized non-operating
income in that amount in its quarter ended June 30, 2000.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE.
Item 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
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
NONE.
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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 and Chief Operating Officer
(Principal Financial Officer)
By /s/ Gary Smith
----------------
Gary Smith
Vice President and Controller
(Principal Accounting Officer)
Dated: August 14, 2000
------------------
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